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D.R. Horton a Home for Bears

The homebuilders have been under assault by the bears for almost two years.

But it takes a lot of time to wring all the hope out of a multiyear bull market that has enjoyed such widespread participation.

After beginning their decline in mid-2005, many of the homebuilding stocks caught some buying interest last summer.

As I understood it, a lot of the value-driven money managers were seeing some compelling value in this sector, with many stocks trading at book value.

The sector had been moving inversely to bond yields.

As the yield on the 10-year note (TNX) rose, the homebuilders fell. But after peaking at around 5.25 last summer, the TNX fell lower and the homebuilders started rallying.

This symmetry indicated that the market was seeing the homebuilders as an interest rate trade.

That's the obvious dynamic -- rising rates make money more expensive. That makes real estate more difficult to finance (and to refinance).

But it looks like the market is finally seeing that the problem in the homebuilding sector runs deeper than interest rates.

You'd think that the recent peak in the 10-year would once again provide some relief for the homebuilders. But that's just not the case, as they continue to fall.

One particularly onerous chart that's not too late to pounce on is D.R. Horton (DHI - Get Report).

Let's take a look at the monthly chart.

D.R. Horton (DHI) -- Monthly

I've shown a monthly chart of D.R. Horton in order to put the time and price element in perspective. I've also highlighted the last three peaks that form a bearish head-and-shoulders pattern. With RSI moving lower, but not yet oversold, the downward momentum could persist for a while.

This short idea is really meant to be a long-term trade -- just flip the chart over in your mind and think about it. If you saw this same pattern, only upside down, it would be an inverse head-and-shoulders pattern. That's the type of pattern that would have you licking your chops because of all the upside potential.

Get used to the idea that some stocks can be held short for an extended period of time. On a technical basis, the price action is quite bearish. And on a fundamental basis, the trailing P/E is 8.5, while the forward P/E is 14.30. In my book, that makes the stock more expensive ... and I sure don't see business getting any better over the next year.
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ARW $54.42 -0.60%
DHI $23.48 -3.90%
GG $14.73 7.30%
MAT $31.97 0.50%
LVS $40.54 -3.40%


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