Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Shares of Home Depot (HD +1.19%) have taken a trip to the market's basement today, falling 2.6% to lead the Dow Jones Industrial Average (^DJI +0.20%) 0.71% lower as of 1:50 p.m. EDT.
Now, Home Depot still trades just 5% below its recently established all-time highs, so it's not as if the company is falling apart. That being said, a 2.6% overnight drop might be a sign of deeper issues with structural implications for the troubled stock. So what's going on here?
The big news today comes from the Mortgage Bankers Association, which just reported statistics on new mortgage applications. It wasn't good news for Home Depot.
The MBA report showed interest rates falling slightly across all types of mortgages, but actual mortgage applications fell 5% compared to last week's data. Compared to the same week one year ago, the so-called Purchase Index figure is up 4%.
Yet it seems dangerous to base long-term investment decisions on something as ethereal as a weekly market report. Yes, a 5% change may seem drastic in an ultra-short window like this one, but each of these reports should be considered in the context of a longer perspective. Does the longer view look as scary to Home Depot owners as the weekly snaphot?
Well, the last three months of MBA reports show an almost uninterrupted downtrend. The period includes just two upward adjustments to the core Purchase Index figure but 13 drops of various magnitude.
This is the largest drop since early June, when the index finished a long string of weekly declines in which each drop was larger than 7%. Interestingly, Home Depot shares largely ignored that dour trend at the time. The stock continued its market-beating streak, regardless of negative MBA reports.
You could argue that this is poetic justice; Home Depot investors are finally absorbing some of the scary data that was published earlier. But this report is hardly a perfect crystal ball, either way. Consider this: Week by week, Purchase Index values increased as often as they decreased in the months leading up to the 2008 housing implosion. And they continued to do the same in the brutal aftermath.
In other words, Home Depot investors shouldn't take this seemingly scary report as a sign of impending doom. The company came back from the 2008 crisis with a leaner and meaner cost structure, and it has been reaping the rewards of the housing recovery under this more profitable model of operations. The only reason to sell Home Depot today would be if you expect another housing crash on par with the 2008 disaster, which seems like a huge stretch.
And today's news certainly didn't paint the signposts toward that kind of plunge. This big drop is a non-event in the grand scheme of things.
