Trade the Builders' Rising Volatility
Tuesday morning's earnings report from Toll Brothers (TOL) 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), 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), Lennar (LEN) and Toll Brothers were below their 200-day SMAs.
After Toll's warning, KB Homes (KBH), Pulte Homes (PHM) and Ryland Group (RYL) flipped from above to below their 200-day SMAs. Only Beazer Homes (BZH) and Centex (CTX) 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|
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