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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

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.

Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of Technology Report newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback -- click here to send him an email.

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