Don't Look Now, Here Come the Builders

Everyone seems to be focused on a possible top in the commodities and whether we have a market bottom or if it's just a short-covering rally. This speculation, along with all of the negative news about the financial sector, has investors and traders focused on the short-term action in the market.

While this has been happening, few people have seemed to notice that the homebuilders have been the top sector over the last five days, moving up almost 19%. This move has happened while news surrounding the sector has been extremely negative.

David Seiders, chief economist for the National Association of Home Builders, recently said that housing starts fell 30% in 2007 and they could drop nearly that much again in 2008. His forecast calls for new-home sales to fall to a 25-year low of 632,000 units in 2008, down more than 20%. Existing-home sales are projected to drop as well, to a 20-year low of 4.33 million units.

Frank Nothaft, chief economist for Freddie Mac (FRE - commentary - Cramer's Take), appears to be even more negative. He believes that parts of the country are already in recession and that there is a risk of nationwide recession.

Standard & Poor's seems to agree; it cut its ratings on a bunch of homebuilders on Feb. 15. It states that the weak housing markets will pressure profits -- it was reported this morning that U.S. home prices fell 11.4% in January, the steepest drop since data for the indicator were first collected in 1987 -- and that the companies will have to further amend terms of debt facilities with banks.

In the midst of all this Hovnanian (HOV - commentary - Cramer's Take), which reported a net loss of $130.9 million in the first quarter. It announced that it expects to come through this year with absolutely zero bank debt.

Hovnanian

Click here for larger image.

Source: TC2000

That certainly didn't seem to impress analysts, as seven of them recently decreased earnings estimates while only one increased his outlook, according to First Call.

Earnings per share are expected to be down $5.34 in 2008 and down $1.53 in 2009. That is expected to change in 2010, when earnings are projected to be up 86 cents. Even with this bleak outlook, the stock has recently broken above the 200-day moving average and was up almost 7% Monday.

You can see from the chart that the move was backed by very strong volume over the last two days, and institutional money stream has been very strong and has broken above recent highs. The price has also broken out above a six-month base and now looks ready to test $16 resistance level.

It certainly appears that the intermediate-term trend has changed from down to up, and as long as the price remains above $10 a share, the trend will be intact.

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KB Home

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Source: TC2000

KB Home (KBH - commentary - Cramer's Take) is expected to post earnings this week. Analysts have been much more positive on this homebuilder, with no downgrades and one upgrade. The company is expected to lose $2.44 a share this year, and turn slightly positive in 2009, according to First Call estimates.

The price has not yet broken above the 200-day moving average, but the volume patterns and institutional money flow points to a good possibility that that will soon happen. Unfortunately, the stock will immediately have to deal with significant resistance around $30. A break above that would likely encourage intermediate-term run into the high $30s.

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Meritage Homes

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Source: TC2000

Meritage Homes (MTH - commentary - Cramer's Take) had some positive news recently when board member Robert G. Sarver bought 25,000 shares at between $13.88 and $13.99. This is not something you would normally see if insiders suspect substantial downside in their business.

The price has been in a basing pattern for the past eight months, and Monday it broke out above the 200-day moving average on solid volume. This breakout was led by a new high in institutional money stream over the past eight months. The stock is currently up against resistance in a $20 area, but a break above that could lead to an intermediate-term run up around the $30 area.

Homebuilders are currently trading at steep discounts to their book value, but the question is whether the flailing economy will drag their earnings lower and in turn take the stock prices with them.

I've said many times before that I want to start taking positions in a beaten-up sector when investors are disgusted and all the news is negative while the price is moving up.

If the homebuilders can continue to hold above their 200-day moving averages, we may have seen the worst, and the intermediate- to long-term price trend will have a good chance to change from down to up.

The key in investing in these situations is to use protective sell stops under recent breakout points and scale in over time.

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On a side note, I want to let you know I will be doing only one technical piece per week. Don't hesitate to email me with any questions. I will still do economic, fundamental and market sentiment columns in addition to my technical pieces.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.