Buy the Bad Housing News Fails Again

By Dr. Duru written for One-Twenty

February 23, 2007

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More bad news from the homebuilders, more reasons to buy homebuilder stocks, right? Not this time. Give the "contrarians" buying homebuilder stocks credit - they have been remarkably consistent in their zeal for bad news. But lately, it seems this zeal is finally starting to show some cracks. On Thursday, Toll issued an earnings report that reminded us yet again that the bottom in the business of homebuilders remains elusive. Revenues, orders, and earnings all continue to fall. The one glimmer of hope is that the cancellation rate was not "as bad" as it was in the previous quarter. (Click here for some commentary on the report from The CEO tried to offer up the unique New York City real estate market as a beacon of hope. Perhaps that was what had the buyers gapping up the stock, TOL, at the open on Thursday. The buy the bad news gambit lasted less than 30 minutes as the sellers quickly overwhelmed the action. Sellers were probably a bit more eager than usual this week given the dim news on inflation, homebuilding starts, and declining home prices that we have heard recently. The rate on the 10-year has ticked up a bit as well.

Even more interesting than the sharp fade action and the growing reluctance of the market to buy every piece of bad news in the homebuilders is the continued divergence in performance of the various housing stocks in the universe I follow. TOL went from opening positive to closing the day down 2.83%. Although the bad news was all TOL, Ryland (RYL) managed to sink for a sliver higher 3.13%. This plunge marked the first significant drop below the 50DMA since November. At the other end of the spectrum was Beazer Homes (BZH) which barely budged for a -0.52% drop.

I last reported on the divergence of performances back on January 7, 2007. Here is a review of where the chart technicals at that time:

Below 50 and 200 DMAs: MTH, HOV, MHO, TARR, PHM
Below 200 DMA, above the 50DMA: BZH (has yet to break through the 200 since the rally from the bottom began)
Below the 50DMA, above the 200DMA: CTX
Teetering on breaking below the 50 and 200: KBH
Trying to hold 50DMA, above the 200DMA: LEN
Still above the 50 and 200DMA: TOL, DHI, BHS, MDC, RYL

The homebuilder ETF, XHB, was still clinging to an up-trend and barely holding onto critical support with the convergence of the 50DMA, 200DMA, and the lower Bollinger Band. It is now in a very similar position although the persistence of the up-trend has delivered a 4.4% increase in price. The support of the 50DMA looks ready to crack again and give the housing bears another chance to get their hopes up for a final coup-de-grace. An ominous head and shoulders pattern even seems to be developing. Seeing will be believing. The XHB needs to fall about another point for the 5 - 7 month up-trend to finally break.

Stock chart of XHB

Here is the updated technical summary for the homebuilder stocks. You will note that there is an even spread in stocks that have detereorated from a technical perspective relative to moving averages in the past 6 weeks or so versus those that have remained the same or even improved. If you take a look at the charts for yourself, you will also see the divergence in stocks that have increased in price versus those that have declined. The market is becoming more and more selective in its "contrarian" bet. If this selectivity continues to play out, I would expect the XHB's uptrend to stall out as well.

Below 50 and 200 DMAs: BZH (detereoration), CTX (detereoration), MHO (same), MTH (same)
Below 200 DMA, above the 50DMA: BZH (has yet to break through the 200 since the rally from the bottom began)
Below the 50DMA, above the 200DMA: PHM (improvement although price is back where it was on Jan 5), MDC (detereoration although price is essentially flat), TOL (detereoration), RYL (detereoration)
Teetering on breaking below the 50 and 200: none
Trying to hold 50DMA, above the 200DMA: LEN (same), KBH (improvement), HOV (improvement), DHI (slight detereoration although price is UP 7.9%!),
Still above the 50 and 200DMA: BHS (same), TARR (improvement)

Be careful out there!

Independent Thoughts
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DrDuru, 2007