On August 1, 2017, Lumber Liquidators (LL) soared +31% on news that the company had recorded their first quarter of earnings since 2015.
The staggering increase in the stock price was of particular interest to us as we had previously laid out the case that Lumber Futures contracts and Lumber Liquidators had a lot in common.
To be specific, we said:
“The coincidence of Lumber Liquidators (LL) declining significantly at the same time as the futures price of lumber (as traded on the Chicago Mercantile Exchange) seems difficult to ignore.”
Apparently, the swing in one price coincides with a follow-through in the other. However, what is most important to investors was the useful information regarding a parabolic increase in Lumber Liquidators (LL) price. We said the following on August 2, 2017:
“LL has a minimum reaction to the violent rise at the $27.03 price. However, the very fact that the stock has had such a dramatic rise in such a short period of time that a normal reaction could take the stock to $19.64. These reactions are in place regardless of whether the price of Lumber Futures continue higher. If Lumber Futures decline then the $12.25 level becomes an active downside target.”
As of August 1, 2018, Lumber Liquidators has declined to $19.19.
The downside target of $12.25 has some potential considering it would not be out of the norm. The key, in our view, is that parabolic increases need to be scrutinized very carefully for the potential downside risk.