Housing Stocks Stabilizing But No Reversal in Sight

Includes: BZH, HOV, MDC, PHM, RYL, TOL
by: Dan Carty

I was stunned to see over the weekend in the latest local housing newspaper the amount of housing sales that took place between the end of August into the middle of September in my area. After seeing nothing but rising supply over the past four months, nearly one third of that supply came off via sales (over 100). While that leaves two thirds still to sell with lackluster demand, this could be a developing situation where supply and demand come together over the next year. In many cases, the deals were sealed when the sellers dropped their prices by at least 20% from the initial listing to entice the buyers.

While situations like this are helpful, I would say that this is nothing more than a dead cat bounce for the housing market with the confirmation coming from the homebuilders. The homebuilders are stabilizing but very few are showing a reversal pattern to the bullish side. This shows some participation but not enough to say the bulls are in control. Of those few reversing from the lows, there is still a prevailing downtrend in play as the buy side of the equation has not bounced while the sell side has moderated. While I remain long on Pulte Homes (NYSE:PHM), I am unwilling to jump into more of these names with both feet. With that said, here are a few technical observations on the homebuilders.

Pulte Homes (PHM)

Pulte continues to bounce solidly from the lows as the reversal pattern up continues to hold. I would remain long at this juncture and continue to look for the $35 level to say goodbye. The sell trend has reversed hard to the downside relieving the pressure from shorts. On the buy side, there has not been as much participation which is the main reason I maintain my open limit to sell around $35. If the buyers come to the table with some more influence than they currently have, I would reconsider my stance.

Beazer Homes (NYSE:BZH)
Beazer is attempting to find support down here at the current levels though the selling trend still remains in bearish camp and not exactly breaking down. Like Pulte, the buying side of the trend for BZH is weak but unlike PHM, it is getting weaker. It's now approaching a previous point of support from an overbought/oversold standpoint where it bounced. Conversely, the price action is just flat out ugly which continues to argue that the existing trend will hold. I remain bearish on this company.

Hovnanian (NYSE:HOV)
Hovnanian put in a reversal pattern up on the long term chart and appears to be heading higher towards the 33 level with $40 a small possibility. The basis for the latter price being a small probability is from the overhang of the selling trend which remains quite strong versus the buying trend remaining mediocre. Given the reversal though from the lows, things look to improve for this situation going forward. I would be bullish.

MDC Holdings (NYSE:MDC)
MDC looks like it has some staying power according to the charts to the upside. The selling pressure was not that dramatic since homebuilders turned over while the buying trend is turning up. The reversal pattern looks somewhat like the 2000 reversal from the lows though given the overhang from the market now vs. then, the bounce will probably not be as strong. The evidence currently supports a bullish stance on this company.

Ryland Group (NYSE:RYL)
RYL bounced along with the sector over the last few weeks but the indecision in the chart is still evident. Also the selling pressure is still holding the upper hand though some has been unwound recently. The buying side of the equation remains weak and is not showing any signs of bouncing. And given the structure of the trade this past month, RYL is more likely to move lower than higher. As a result, I would remain bearish.

Toll Brothers (NYSE:TOL)
Like Hovnanian, TOL has put in a nice reversal from the lows and perhaps has formed a base. The sell trend has reversed lower below midline which is bullish as it shows the sellers perhaps are drying up. The buy side is rising though has not broken out or even crossed the selling pressure line. Is a long term bounce coming? I don’t believe so but I think the stock could migrate higher towards the 30 level.

Just a quick note. On each of the positions above, I would have stops on the buys below the recent lows. On the bearish picks, I would hold stops probably above the July levels. In addition, I am considering adding HOV and TOL to my portfolio, though more analysis is needed at this point.

PHM BZH HOV 1-yr chart:

MDC RYL TOL 1-yr chart:

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