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Dr. Kris hails from the land o' lakes, beer, bratwurst, and Bucky Badger. She traded in her cheese hat for a propeller beanie and has never looked back. She has two degrees from MIT because one just wasn't enough. Her life goal was to figure out the universe and having done that (at least to her... More
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  • Market Notes: Home Builders Crumble -- July 8 0 comments
    Jul 8, 2013 6:44 PM | about stocks: KBH, MHO, LEN, XHB

    One might have thought that this morning's pop on the open would continue to boost the major averages but something funny happened on the way to the rally--the bears stepped in. The early morning buying pressure dried up as the bears began to fight back. Buying pressure virtually equalled selling pressure at the close and market direction is still anyone's victory to claim at this point.

    The good news is that the volatility index (VIX) finally managed to close the day under 15, the lower bound of the bull/bear demilitarized zone. (Above 20 is considered bearish while under 15 is considered bullish.) This is the first time in over a month it's been able to do that and is one strike against the bears. However, today's topping tail in the market-leading Dow Transports (DTX) could be the start of another leg down. As you can see from the chart above, the overall trend is down. While the chart of the S&P 500 (SPX) is showing a similar pattern, it's interesting to note that the small-cap Russell 2000 (RUT) hit a new all-time high today. One thing is for sure, though, divergences abound and it's anyone's guess which side will wind up the victor. Results of this earnings season--kicked off today by Alcoa (NYSE:AA)--could be a deciding factor.

    Market Lowlights: Home builders crumbling
    Potential first time home owners are getting stung not only by the recent jump in mortgage rates but also by rapidly rising home prices. This is forcing some back to the sidelines and the specter of rising interest rates will only serve to keep them there. This gloomy report spells trouble for the home building industry. The spectacular rally made by the home builders following the bottom of the 2008-2009 mortgage crisis appears to have come to an end.

    Consider the home builder etf (NYSEARCA:XHB). This basket of home building stocks found a bottom at $8 in 2009 and went on to gain 300% to reach its peak value of $32 this past May. Since then, the home builders have been back-sliding on fears that the Fed will begin phasing out its quantitative easing program.

    Today especially wasn't kind to this industry group with most of the major players suffering losses in the 2-4% range today. Of special note are KB Home (KBH, $17.68), Lennar (LEN, $33.05), and M/I Homes (MHO, $21.81), all of which broke intermediate support levels. Unless the mortgage market firms up or housing prices drop, I'm expecting further downside in this group despite still reasonable valuations.

    But is now the time to short this group? Maybe. My pick out of the above mentioned stocks would be Lennar as it has the weakest chart of the bunch. However, I would probably wait for the XHB to break below $28 support before initiating a short position. Lennar has fairly liquid options and there's quite a bit of open interest in the July 32 put strike. Please note that if you're considering this trade, it's not for the faint of heart and as always, do your own research first.

    Subscriber Notes: There are no new entries.

    Stocks: KBH, MHO, LEN, XHB
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