Homebuilders Look Over-Extended

Includes: DHI, LEN, TOL
by: TradingHelpDesk

Since the December 1st pivot date the entire stock market has rallied higher. Most industry groups have participated in the broad-based advance. Often money will rotate from one sector to the next depending upon how far a particular sector has rallied. Well, it now appears that the homebuilder sector has now reached the top of its trading range. When a stock or industry group reaches the top of its range the institutions that own the stocks will usually look to start unloading or sell the stocks. This is usually when the public or retail traders are buying the stock because they feel that they want to own something that is up so much. The public usually does the opposite of the institutions.

Toll Brothers Inc.(NYSE:TOL) has rallied higher since late November when the stock traded around $17.35 a share. Today Toll Brothers Inc. is trading at $19.50 and this is the high range for the stock over the past three months. Therefore, this is when the institutions will begin to start unloading or feeding the stock out to the public. In other words a pullback will begin shortly.

Lennar Corp.(NYSE:LEN) is another leading homebuilder stock that has rallied higher since late November when the stock was trading at $15.00 a share. Tuesday the stock traded as high as $18.49. This stock is now trading around a good short term resistance area and a pullback could be near. The next important resistance area for the stock will be around the $20.00 area.

D.R. Horton Inc.(NYSE:DHI) is another leading homebuilder stock that was trading around $9.80 in late November. Tuesday the stock was trading just under the $12.00 level, which is very good resistance. On November 12th, 2010, the stock traded as high as $12.20 a share, so this would be the high range for the stock and D.R. Horton could reach that level. However, this is where the institutions will start to distribute or sell stock. Therefore, it is prudent to expect a pullback soon.

This is the holiday season so it is possible to see stocks hold up into the holidays. However, when certain stocks or industry groups reach their prior highs of the range it is a time for the institutions to take profits. Therefore, expect pullbacks in the home building sector soon.

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Disclosure: None