Analyst delivers warning about Home Depot stock

Home Depot was a big winner when low-interest rates and stimulus payments boosted housing and do-it-yourself home upgrades. However, its business has struggled lately because the Federal Reserve increased interest rates, making mortgage and home equity loans less affordable.

The uncertainty surrounding housing demand and the future path for interest rates has made it a roller-coaster ride for Home Depot  (HD) - Get Free Report shareholders. Home Depot's stock rallied last fall through January this year, fell sharply until May, rallied again until August, and then sold off again through October.

Home Depot shares have been climbing this month, but given its see-saw path this year, investors are likely scratching their heads wondering what could be next.

Real Money analyst Bruce Kamich recently updated his thoughts on Home Depot's stock. Here's what he thinks its shares are most likely to do.

Home Depot struggles amid uncertain economy

Home Depot recently reported its third-quarter financial performance. The results left much to be desired.

Consumers have been struggling to find room in their budgets. Inflation skyrocketed last year, and while it's growing more slowly this year, prices remain high enough to continue squeezing shoppers' budgets. 

Related: Home Depot sends a very different message about the economy

Households have also started to see weakness in the jobs market. Unemployment remains low but has risen from 3.4% to 3.9% this year as companies have let go of workers to bolster their profits and offset inflation. Finding a new job isn't as easy, either. The latest Job Openings and Labor Turnover Survey (JOLTS) showed one million fewer open jobs in September than one year ago.

Coupled with the reality that higher mortgage and home equity loan rates because of the Federal Reserve's increasing the Fed Funds Rate by 5.25% since March 2022, it's unsurprising that Home Depot's sales have suffered.

Home Depot's revenue declined by 5% in the third quarter to $3.9 billion. The company's profit retreated 53% to $0.52 per share. That's not encouraging because it reflects a general shift from big to less profitable` small home improvement projects.

"The Fed definitely has a higher-for-longer monetary posture and that's going to continue to pressure durable goods, in financing or motivation for larger home improvement projects," said Home Depot's CEO Edward Decker on the company's quarterly conference call.

The uncertain economy has Home Depot expecting a 3% to 4% decline in fiscal 2023 sales. 

Home Depot's stock price charts raise questions

Bruce Kamich has analyzed price and volume charts for professional investors for over 50 years. He reviewed Home Depot's daily and weekly charts on Nov. 16 for insight into what could happen next to Home Depot shares. Overall, he came away cautious.

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"Home Depot is currently struggling to stay above the 200-day moving average line, which still has a negative slope. The trading volume only shows an increase in recent days and that is a problem for old-time chart watchers who like to see volume confirm the trend," wrote Kamich. 

Kamich notes that point-and-figure charts suggest a potential path higher to about $340. However, that only gets Home Depot shares about back to where they were this summer, and there's no guarantee it will happen.

"In the weekly Japanese candlestick chart, I can see a sideways trading range market for HD for nearly two years," said Kamich. "The weekly [on-balance volume] OBV line shows weakness from early August and limited strength in November. The [moving average convergence divergence] MACD oscillator is below the zero line but narrowing. Maybe the longer-term sideways move continues?"

On balance volume is essentially a running total of up minus down day volume, and MACD is an indicator technical analysts use to gauge momentum. For Kamich to be bullish, he'd want to see better up-day volume and a more positive momentum.

"I am not excited about the upside on HD and would rather pick up a few items in the store than pick up shares of the company," concluded Kamich.

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