Trade the Builders' Rising Volatility

Tuesday morning's earnings report from Toll Brothers(TOL Quote) prompted me to review my profiles of the homebuilders.

On June 17, I wrote that the homebuilders were the hottest momentum trade in the market and warned that the monthly chart profiles had become parabolic, a precursor to all bubbles. On Aug. 26, I wrote that shares had peaked in July, and I shared my observation that St. Joe(JOE Quote), which is a real estate operating company, not a homebuilder, was leading the homebuilders both up and down. On Oct. 11, I argued that the homebuilders had become value investments. I maintained that St. Joe was the key to stability and that it was holding my semiannual pivot at $59.91.

On Oct. 11, all of the homebuilders I profiled were below their 200-day simple moving averages; this was the risk my model showed in earlier articles. Now the stocks are straddling their 200-day SMAs. On Monday, St. Joe, D.R. Horton (DHI Quote), Lennar(LEN Quote) and Toll Brothers were below their 200-day SMAs.

After Toll's warning, KB Homes(KBH Quote), Pulte Homes(PHM Quote) and Ryland Group(RYL Quote) flipped from above to below their 200-day SMAs. Only Beazer Homes(BZH Quote) and Centex(CTX Quote) ended Tuesday still above their 200-day SMAs.

At their July highs, all of the homebuilders had overbought 12x3 weekly slow stochastic readings (above 80 on a scale of zero to 100). In October, they were all oversold with readings below 20. Now the weekly chart profiles are mixed.

At midyear, all the stocks were overvalued, with St. Joe more than 40% overvalued. All were undervalued a month ago, and they remain undervalued, with St. Joe just slightly overvalued.

With mixed valuations and mixed chart profiles, the homebuilders have become trading vehicles that should be bought at value levels and sold at risky levels, with profits taken at the pivots listed below.

Key Metrics for the Homebuilders
Company Name	52-Week Highs	11/8/2005 Closes	200-Day SMAs	Value Levels	Pivots	Risky Levels
St. Joe	85.25	64.57	72.39	59.91 S / 51.66 A	67.16 S	73.92 Q / 76.74 M
Beazer Homes	67.5	59.98	55.55	51.76 S	56.50 Q	62.98 Q / 63.36 M
Centex	79.66	66.52	64.82	56.38 A	63.81 S / 68.78 M	71.13 Q / 73.39 S
DR Horton	42.82	30.6	33.86	28.50 S / 24.78 A	35.52 M / 35.76 S	38.98 M / 42.28 Q
KB Homes	85.45	63.74	66.56	52.56 S	67.90 S	75.27 M / 78.34 Q
Lennar	68.86	55.3	58.74	50.89 A	59.11 S	62.45 M / 66.51 S
Pulte Homes	48.23	37.77	39.43	31.01 S / 26.98 A	37.90 S / 41.28 M	46.51 Q / 47.52 M
Ryland Group	83.25	67.64	68.83	61.82 S / 46.24 A	69.11 M / 70.76 Q	73.41 S / 75.98 Q
Toll Brothers	58.67	33.91	44.13	31.08 S	40.57 S	44.05 M / 46.14 Q
Source: Global Market Consultants

In sum, the homebuilders lost their momentum status, became value trades and are now tradeable back and forth using my value levels, risky levels and pivots. Use my table and let the volatility lead to trading profits.