- The major event on the economic docket for the week starting May 19 is the release of the FOMC minutes from last month's Fed meeting on Wednesday.
- Economists are expecting reasonably strong sales growth in April compared to a contraction in March.
- Traders should be able to profit from going long these names ahead of this coming week's new and existing home sales data -- if the numbers are good.
By Scott Rubin
The U.S. stock market has been on rocky footing thus far in 2014 with equities only managing meager gains through the middle of May.
The old adage is to "sell in May and go away," but nimble investors may be able to find profitable, catalyst-driven ideas in the coming week. T
The major event on the economic docket for the week starting May 19 is the release of the FOMC minutes from last month's Fed meeting on Wednesday.
In addition, a number of FOMC members, including new Fed Chair Janet Yellen, will be making scheduled comments. On Tuesday, FOMC members Charles Plosser and William Dudley are expected to speak. They will be followed by Janet Yellen and Narayana Kocherlakota on Wednesday ahead of the FOMC release.
Important housing data will be released on Thursday and Friday. Specifically, existing home sales figures will come out on Thursday followed by new home sales on Friday. Investors will be watching both the annualized and month over month numbers closely in order to gauge the strength of the housing market, which remains a critical area of the overall economy.
Economists are expecting reasonably strong sales growth in April compared to a contraction in March. The consensus estimate according to Briefing.com calls for 4.66 million existing home sales last month versus 4.59 million in March and 4.92 million in April 2013. This represents estimated month over month growth of 2.1 percent compared to a contraction of 0.2 percent in March.
New home sales are predicted to be 415,000 compared to 384,000 last month. In March, new home sales figures plunged 14.5 percent to 384,000 compared to February.
This badly missed expectations calling for an increase to 455,000. In fact, March's new home sales figures were the lowest since July 2013. A number of fundamental factors contributed to the disappointing report, and investors will be anxious to see if the trend continued in April.
Specifically, interest rates have been rising in 2014, with the yield on the 10-Year Treasury note trading up around 0.57 percent to 2.52 percent. In turn, mortgage rates have also been trending higher, making home ownership less affordable for borrowers.
At the same time, home prices have also increased significantly versus a year ago. In March, new home prices were up 12.8 percent compared to the year ago period.
The result has been rising inventory levels and investor concern over the potential for continuing stagnant sales.
This outlook has been reflected in the markets, with the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) falling a little better than seven percent year-to-date. The heavily traded ETF, which can be viewed as a loose proxy for the health of the housing market as a whole, has been in a persistent downtrend since briefly trading above $34 at the end of February.
Furthermore, jittery investors may push the XHB lower at the beginning of the week ahead of Thursday and Friday's sales data. Nevertheless, the XHB did rise a little better than one percent last Friday.
A look at specific homebuilding names tells a similar story as the Homebuilders ETF, as the majority of individual stocks in the sector have underperformed the S&P 500 in 2014. Among the biggest losers have been KB Home (NYSE:KBH) and Toll Brothers (NYSE:TOL), which have recorded losses of seven percent and 13 percent, respectively.
Traders should be able to profit from going long these names ahead of this coming week's new and existing home sales data -- if the numbers are good. Nevertheless, this trade's risk/reward does not appear particularly attractive given deteriorating fundamentals and optimistic expectations.
Rather, traders may want to consider putting on bearish positions in derivative stocks ahead of next week's economic numbers.
A number of stocks related to the housing market popped on Friday afternoon, and may be presenting short opportunities at the beginning of next week.
Among the names that stand out are Bed, Bath & Beyond (NASDAQ:BBBY), Ethan Allen (NYSE:ETH) and Pier 1 Imports (NYSE:PIR). Bed, Bath & Beyond is sitting near 52-week low levels and has been trading very heavy in recent months. Year-to-date, the shares have lost better than 22 percent, and are down roughly five percent over the last month.
Ethan Allen is also sitting near new 52-week low levels and traders are lining up to short the name, which currently has a short float of around 17 percent. There is a key support level in the name at around $23.25. If this area is breached to the downside early in the week, don't be surprised if an even deeper sell-off is triggered in the stock.
Like its counterparts, Pier 1 closed on Friday trading in the vicinity of its 52-week low and could see more downside if housing disappoints. Relative strength in the name is below 50, the stock has a short interest of 7.50 percent, and is down better than 23 percent so far in 2014.
Playing Ethan Allen and Pier 1 from the short side, in particular, makes sense for traders looking to make an aggressive bet on a bearish week for homebuilders and related stocks due to their high betas and small market-caps.
If the market reaction to Wednesday and Thursday's new and existing home sales figures is indeed negative, both of these stocks should make sizable moves.
On the flip-side, there are also a couple of stocks that bullish traders may want to keep an eye on. Specifically, both Williams-Sonoma (NYSE:WSM) and Restoration Hardware (NYSE:RH) have been trading much stronger than other home-retailing names.
Over the last three months, Williams-Sonoma has risen more than 17 percent while Restoration Hardware is up a little less than 13 percent and jumped almost four percent last Friday.
Both are very high-quality names with businesses that are dependent to a large degree on the performance of the housing market as a whole.
In a market that has basically gone nowhere so far this year, active traders will want to continue to look for catalyst-driven ideas.
No matter whether the news is bullish or bearish, housing related stocks should present opportunities this week.
Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.