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Wednesday, June 23, 2010

Lumber Liquidators as Play on Housing Weakness

- Existing and new home sales numbers for May were extremely weak. Home Depot stock appears to have broken down from its bullish channel. I expect Lumber Liquidator's stock (LL) should follow. Homebuilders (XHB), & building materials stocks (AWI, USG, etc.) all have fallen 20 - 30% from their recent highs, as well. I do not see why LL stock has shown such relative strength.
- Implied Volatility on Aug options are slightly high, but I expect IV to rise once LL stock also breaks below its bullish channel support line. I recommend buying Aug 25/20 put spread for $1.40 or better. For more sophisticated investors, I would buy XHB and sell LL as a long/short strategy to seek alpha.

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