This column was originally published on RealMoney on May 3 at 11:35 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
I have always received a fair amount of email about the homebuilding sector. Back when these stocks were moving higher, the question was, "Is it time to sell them?" Now that they've pulled back substantially, the question is, "Is it time to buy them?" Well, it's much easier to answer the latter question than the former.
We all know that real estate prices have been, let's say, "consolidating." As we look at the monthly charts of several homebuilder stocks, we'll see that they've pulled back substantially.
I don't think the pullback is done. Depending on your timeframe, the correction in the homebuilder stocks could just be getting started.
I understand that the valuations are compelling. Heck, most of the major homebuilders sport forward price-to-earnings ratios around 6 or 7.
But here's the problem: Commodities such as copper, lumber and oil are moving higher than most have anticipated. Homebuilders tend not to hedge against sustained price increases. Neither can they pass on these higher commodity costs to their customers. I suspect that the lowered guidance provided by
Tuesday is the first in a series of guidance revisions by this sector.
While the time will come to buy the homebuilders, I don't think the pain is over yet.
If you're selling these stocks now, you're late -- but I don't think you're too late.
Let's look at charts of the Philadelphia Housing Index,
This weekly chart of the Philadelphia Housing Index shows consolidation over the past several months. However, the index peaked clear back in July. Since then, the bulls have been unable to do much. At present, the Housing Index is sitting on support, and any further decline will reflect what we're seeing in the monthly charts below.
This monthly chart shows the consistent price behavior of Ryland. Since 2000, each tag of the middle Bollinger Band was followed by a higher high. However, I've highlighted the recent change in character in the chart above. Notice how the current low is preceded by a lower high? That's a first! A top tends to be more of a process than an event. While Ryland may be a bit oversold, I think any advance will be simply an opportunity to get off a short from higher levels.
This monthly chart of Pulte is similar to Ryland above. But notice how the stock is resting right on the long-term support line. The stock has pulled back significantly over the past year, but is only now testing the uptrend. I'm looking at $35 as the battle line. If you're still long, you might consider selling when the bears push the stock lower.
Lennar is another stock that's fallen beneath the middle Bollinger Band (i.e., the 20-period moving average). The relative strength index is leading the rollover. The peak in early 2005 was the first sign of a negative divergence that is now obvious to all. I don't see any reason to hang on to this stock.
This monthly chart of KB Home is a bit more dramatic than the others. The last six months of activity look like a top to me. Look at the RSI indicator; it's down at the midline again. Each tag of the midline by this oscillator has been accompanied by a tag of the middle Bollinger Band in the price. Each Band tag has led to an impressive multi-month advance. KB Home is due for a short-term bounce, but I'll be very surprised if the bears back down very far. I think the stock will move lower, possibly to $40 or so.
Be careful out there.
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Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. At the time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
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