D.R. Horton a Home for Bears

This stock continues to fall along with the rest of the homebuilders.
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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.

The short entry would be right around $19.45, just below last week's low. You can choose your own stop, but I'd suggest a stop within 10% of the entry price, which is $21.40. If the stock goes that high, you probably just want to let the rally run its course and get a better short entry. Shares opened at $19.87 Thursday.

Updates on Previous Picks

  • Accredited Home Lenders (LEND) - Get Report: Last week I made a boo-boo. I suggested Accredited Home Lenders as a short idea and completely forgot about the pending sale to Lone Star Fund. Many folks contacted me about this, wondering whether I knew something they didn't. My answer is no -- actually, you knew something I didn't. There's nothing more to say except that I'll try to do better next time. So I'm taking Accredited Home Lenders off the watch list as there's no short here.
  • Arrow Electronics (ARW) - Get Report has been trending lower, but the stock advanced more than 4% on Tuesday. The current stop at $40.90 remains intact. Shares closed at $39.97 Tuesday.
  • Assisted Living Concepts (ALC) - Get Report hit its stop at $10.75 last week and was closed out.
  • Continental Airlines (CAL) - Get Report hit its stop at $36.50 on Tuesday and was closed out.
  • Goldcorp (GG) : The short entry was at $25, and the adjusted stop is currently $24.55. No change in that level. Shares closed at $24.41 Tuesday.
  • Las Vegas Sands (LVS) - Get Report: After trading a couple of points below the short entry, Las Vegas Sands rallied to trigger the stop and has been closed out. While I might be accused of keeping stops too tight, in light of the bull market we are enjoying, I don't give short positions much room.
  • Mattel (MAT) - Get Report: Since the short entry at $27.75, Mattel has been moving lower and fell to $24.90. The stock is firming up at this level, but remains below the current buy stop of $26.10. No change in the stop. If Mattel runs back above $26, there's no reason not to just take the profit and move on. Shares closed at $25.64 Tuesday.

At the time of publication, Fitzpatrick held no positions in the stocks mentioned, although holdings can change at any time.

Dan Fitzpatrick is the publisher of


, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;

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