Don't Panic, Let's Consult The Charts: I'm Looking At The Homebuilding Sector To Buy

Summary

Don't let the news convince you that the coronavirus resurgence is causing this market sell-off.
Also this is not about Jay Powell refusing to confirm a "V" recovery in the economy. He's not in the boosterism business.
If you have been reading my commentary you know that I thought the market should have leveled off weeks ago.
This is purely an internal market reaction, AKA a "technical" action. Very simply, we ran out of a supply of buyers. Fear is now reigning over greed, which is very natural given how high we flew.
I'm surfacing the home building sector since it isn't as dearly priced as the technology sector yet has some really nice growth aspects to it.

This selling is not about Wuhan Fever Redux

This is not the fearsome second wave. The disease did not disappear from the first time around, so the spike in Texas and elsewhere is just that the disease started there later, so this rise is part of the cycle. Let’s also make note of the fact that we have made substantial strides in treating this disease. No longer are we throwing people onto ventilators at the drop of a hat with an 80% mortality rate, nor are we putting people infected with COVID-19 into nursing homes. I don’t mean to sound flip, but in hindsight, shunting people known to be infected into nursing homes was not the smartest thing to do. For some reason, no one is talking about that back to stocks, and away from politics. Also, we have Remdeisvir from Gilead (GILD), and Regeneron (RGEN) just announced a huge trial for their antibody treatment. RGEN's head of research was interviewed on CNBC and he sounded very sure that this cocktail will be effective. The test has four arms for prevention, and two to treat the ill. It’s a multi-antibody treatment, and he threw shade on any effort for a single antibody, compared to their effort. It might have been bravado, but his confidence was very impressive. Also just yesterday, Johnson & Johnson's (JNJ) head of research announced that they will be in phase 3 testing by July, instead of September. Moderna (MRNA) also is stating today that they will bring trials sooner than expected as well. We should keep this in mind when you hear from the chin pullers that this sell-off is about a resurgent COVID-19. This is a classic sell-off because we went too far too fast. Profit taking, purely technical in nature, so let’s put our technician hats on and consult the charts.

Resistance becomes support

Technicians and chartists will tell you that resistance lines become support once they are breached. In this case, we sliced through so many resistance lines as if they weren’t even there. Let’s first look at a three-month chart of the SPY to stand in for the S&P 500, since that's how most equity traders trade it. Of course, the S&P 500 is a cap-weighted index of the 500 biggest stocks in the US stock market as well. So it's a more accurate indicator than the Dow, which is the most noted in the media because it's the best known (here).

Let me be clear, I don’t at all expect these lines to be broken, at least in the next week or two. The black line is where I think we could fall to if things get out of hand, that would be 295.5 in the SPY which let’s just say that there's good support at 3000ish. If that line doesn’t hold then the next level is around 2900. I can’t imagine falling any further. This is a round about way to say, that I suspect that this is a 3% to 5% sell-off, 7% tops.

The only way that I could see a more severe selling season if we would see new data that tells us that the reopening is going to be halted. I think that's more of a September/October action than what we have here. Also, I could see a persistent recession scare. The notion that all this pump-priming by the Fed and the fiscal action by Congress and the administration will not be enough to pull us out of a depression. There's really so much that can be done on the fiscal side, we aren’t even talking about infrastructure spending. We need to build out 5G, we need to provide every school-aged kid Internet access for schooling. We need to rebuild our bridges and our airports. There are tons that could be done, for jobs, and also for helping small businesses to survive.

I'm taking this sell off as an opportunity to invest in the homebuilders

This is not an area that I'm an expert in, however, it makes a lot of sense from a lot of angles. I have spoken about demographics and family formation being positive for homes. Also, this sector is not as frothy as the tech sector, yet has very favorable trading characteristics.

There are a bunch of home builders out there, and apologies if I missed your favorite. I'm going to list some just to prod you to do some research. These are the well-known home builders: Pulte Homes (PHM) KB Homes (KBH), DR Horton (DHI), Toll Brothers (TOL), Lennar (LEN), apologies if I left any of the usual suspects out. I'm sure there are a ton of brokers out there, like Re/Max (RMAX) and Realogy (RLGY). The technology-powered real estate names are Zillow (Z) (ZG) and Redfin (RDFN). Why now? Why am I focusing on this sector and away from my usual tech go-to names? Well for one, I think a lot of tech names are getting beaten down today, and it makes more sense to pick through the wreckage next week. Also, I think housing has been an area that I haven’t spent enough time on myself, and think it deserves to be surfaced. I think these names should go higher, and will likely not fall as hard right now as many of the cloud-tech names that I usually write about.

So take a look at housing names, and of course, Home Depot (HD), or a Lowe's (LOW) works as well. It’s just that I have spoken about HD and Lowe's more often than the actual home builders.

My Trades: I bought DHI and KBH, also Z. I like Zillow’s home buying business. I think it makes a lot of sense as a convenience for home sellers and economics. Since it’s a seller’s market Zillow can be a resource for real estate brokers to get inventory to sell, since I can imagine that people will buy a home without a broker showing the home. Again, do your own research and make sure you have confidence before you pull the trigger. Conviction is a very important aspect of trading. Things could get scary out there and you don’t want to make a trade, only to get scared out of it the next day. Better to hold on to your cash and wait.

This article was written by

David H. Lerner

29.47K Followers

David H. Lerner is an analyst with a decade of experience utilizing his professional background in software consulting and technology to identify market trends and provide long and short trade ideas. David employs a combination of technical analysis and market psychology to capitalize on narratives for outsized returns. He also utilizes “Cash Management Discipline,” a simple trading style to hedge against the volatility of today’s market climate.

He leads the investing group Group Mind Investing where he uncovers actionable trading and investing ideas nearly every day. Other features include: long and short swing trade alerts, daily macro analysis, weekly articles, and chat for community interaction and questions. Learn More.

Analyst’s Disclosure: I am/we are long DHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am also long in Z and KBH The information contained in this writing should not be construed as financial or investment advice on any subject matter. I am telling you what I am doing, not what you should do. Before you trade or invest educate yourself thoroughly on the company and stock you are trading or investing in.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.