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Homebuilder Trading Opportunities Continue

NEW YORK ( TheStreet) -- Homebuilding is an important segment of the U.S. economy, and the stocks in this group continue to have their ups and downs. In this environment homebuilder stock ratings have been flip-flopping between buy, hold and sell. This volatility should continue to provide buy-and-trade opportunities.

On Sept. 26 I wrote, Homebuilder Volatility Provides Trading Opportunities and on this date the PHLX Housing Sector Index closed below its 200-day simple moving average, then declined to a low of 169.71 on Oct. 9. The rebound since then has the housing sector index back above its 200-day, now at 184.76.

The weekly chart for the housing sector index shows the decline from its mid-2005 high to its March 2009 low and the subsequent rebound back above its 200-week SMA as 2012 began. The 200-week is now at 130.31. The chart also shows that the 2013 trading range has been influenced by the 50.0% and 61.8% Fibonacci Retracements of the entire housing crash. These key levels are 174.17 and 202.51 respectively. As this index declines towards the low end of this range, homebuilders tend to be upgraded and be near tests of value levels. At the upper end of this range the homebuilders tend to be downgraded near tests of risky levels.

Chart Courtesy of MetaStock Xenith

The National Association of Home Builders (NAHB) Housing Market Index (HMI) slipped to 55 from 57 in October, still above the neutral 50 reading. Because of the partial shutdown of the government we do not know the housing starts figure for September. The NAHB estimates that Housing Starts came in around 900,000 units with single-family starts stable at around 625,000. When you look at the chart below observe that when the HMI is above 50, single-family starts were between annual rates of a million and 1.2 million. Homebuilding is thus running well below the industry's potential.

The NAHB continues to see pent-up demand for new single-family homes across the country, and attribute the hiccup in the HMI to the costs and availability of labor and lots, and the gridlock in Washington.

It appears that the spike in mortgage rates and the partial government shutdown also attributed to the pause in the market for new homes. While rates are higher they remain low by historical standards and therefore the NAHB expects home building and buyer optimism to recover.

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