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

Jun. 11, 2020 1:47 PM ETDHI, HD, KBH, LEN, LEN.B, LOW, MRNA, PHM, RDFN, RGEN, HOUS, RMAX, TOL38 Comments


  • 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

This article was written by

David H. Lerner profile picture

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.

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Comments (38)

Saw a news clip today discussing how the "rust belt" folks are moving to the "sun belt."
Taxes and a wave of more taxes coming soon to support big city bureaucracies.
DWrek. profile picture
It was fascinating watching the narrative change throughout the day. First it was Fed Speak and profit taking. Then it transformed into 2nd wave.
"3 to 5%, 7% tops". 5.89% today. Down to 2900 in the next days then back up to 3150 and then hang on for the ride down.
Kal Telage profile picture
There is far too much turmoil for charts to predict the market’s trajectory. Soothsaying won’t help you win.
With this kind of risk, if you want to play, throw the dice.
Yet you are predicting....lol
Fire Bird profile picture
I was all out, the day before the pull back, because I saw the NDX not only at ATH, more important was that it hit just the ascending trendline in the one-day time frame and the other indexes had already pulled back the day before. For some stocks it can go to the 50% fib retracement. The fight against the shorts has begone, and that might not have much power because we are at a level of profit taking. Locking into the order books where the most sell orders are located is tricky as everyone knows. The algos have AI that calculates from the trading behavior of all participants what the majority at least expects and this will be realized. Tomorrow everything can be over and we go sideways, or it will pull really down, because in the last week there went a lot of euphoria dollars into the market that has to run for cover. The ATH we have reached now can stay for some time come while we trade 5 to 20% lower. David talked about some scenarios that could bring stocks further down than he expects. I can only say every bad news that could not stop the bulls yesterday will now feed the bears tomorrow.

Home builders can be a good play but this is not what resonates with me. I'm a tech freak and wait for ROKU, TTD, ZS, SPLK, AYX, and AMAT to pull down somewhere between the two or four hour MA. Otherwise I swing TSLA. The amounts traded there are so massive that my fifty or hundred share scalps don’t get recognized.
Yesterday, during Powell’s talk, I got an uneasy feeling and sold everything except July and August calls I have on AAPL and MSFT. 98% cash before I started buying a little today. Picked up some AMZN, FB, DOCU, TDOC, AAPL, MSFT, DXCM and Raytheon Technologies today. Also bought calls on QQQ today out to July. I am sitting tight tomorrow unless we have another big 3-5 % sell off, then I will add to positions. Also like NOW and SHOP. This is a correction and a much needed one. Leisure and travel in the crapper long term. Don’t get sucked into that industry comeback story! Will be years before they do. Stick with Big Tech, Healthcare and Defense for now. Be safe!
GameBuzz profile picture
@Charlied512 Good for you. I bought a short-term SPY put for a couple-week protection while watching Bob Lang at the virtual Money Show, and ended up getting filled for a 100% gain by EOD! Re-bought it at the open today just as insurance. Crazy environment. The new Robinhooders will be getting schooled in volatility for sure. Hope your trades work out well.
Things are not as rosy as you believe

Bloomberg: Brawls Erupt in U.S. Debt Markets After Borrowers Get Desperate.
Bad indeed.
That was a violent sell off today with approximately 20% retracement of the entire run up from the end of March counting yesterday. A lot of the recent move higher has been a circle buy inside of the Robinhood group (lumping in new traders with eTrade, etc). This is the first real down movement they have experienced and you can see them starting to get nervous. It is not full panic yet though.

The algos will amplify any move down because the big money has hated this move up. That group is very motivated to prove that retail is not better than the "smart" money that was short or sitting on the sidelines. There are a lot of people that will not want to hold over the weekend and then we run into a triple witching Friday next week I believe. I don't take any of this as positive and expect the pullback to continue.
Finici profile picture
Who is panicking!!!

I think this "consolidation" is just great as I had cashed up earlier and today closed out some covered writes &c &C. Only thing annoys me is that ROKU usually goes "up" in a sell off but even it got caught in today's "correction". AS to other holdings - well - what I wanted to keep I'm keeping.

I'm looking at BIG but LOW is not bad and might be a better choice than HD but that is like saying - do you like Skippy or Jiff???? ... only thing is LOW's website is cumbersome...

FINMAR profile picture
In Tune! ...tomorrow is another day!
Sometime in early March the markets started to sell off, in anticipation of a negative event, which turned out to be the pandemic. Mr. Lerner wrote an article in early March, as the markets were beginning to sell off. He said (paraphrasing) "the Chinese virus will be over by this Friday." Now it's June, the virus is not over, and Mr. Lerner tells us "Don't let the news convince you that the coronavirus resurgence is causing this market sell-off." Ok, thanks for the insight Mr. Lerner, I'll take it under advisement.
Great logic; if wrong once, a man will always be wrong again. Maybe it’s your own “logic” that has gotten you in trouble. At the end of the day, you need to man up and own your own decisions.
"At the end of the day, you need to man up and own your own decisions."
Is that your idea of "great logic?"
If you are so convinced against Mr. Lerner's logic, why are even then wasting your followinf Mr. Lerner even after 3 months.

From my perspective I find David's articles a good read, Keep it up David!
OptionLover profile picture
Who is panic? You are out of touch!
Travel sector is going down as well as SPY
Blackmolly profile picture
Tomorrows headline.....PANIC. Does this guy flip flop every other day, or what?
i have looked at the charts.
i can ONLY read the top line.
i may need new glasses to read YOUR charts.
meanwhile the market and Fibonacci may be telling a story
your "charts" do not want to hear.
drag0s profile picture
I understand your positive outlook but there is a wave of bad earnings and bankruptcies that will come in Q2 so this could be a lot more of a FA reality check than a simple correction. I was just reading a headline that says 'Starbucks to close 400 stores, enhance ‘on-the-go’ services'. That pretty much says it. The economy as we know it is gone and a serious comeback will take a year or more
If predicting the market was that simple, you’d be too rich to waste your time posting here.
The riots have quiteted, and now the virus fake news are back. How do I know that the virus is fake news? Because the virus was postponed for the riots. Turn of the idiot box!
"Because the virus was postponed for the riots"
Priceless !!
The protests/'riots' will tell us in about two weeks if the virus re-surges. If not then perhaps the virus was over hyped. America opening up is not all it seems. Many businesses large and small are gone for good. Unemployment will run out and states and cities are desperate. You must factor in that the protests were done by mostly young people, of all races, who had their schools, jobs and social contacts taken away in a flash. Any spark would have set off social unrest especially when the Market keep rising. Globally we are in a deep hole. The Market is, and has been, for sometime a Casino.
The homebuilders have been building while other businesses were in lockdown.
They will be the first to report decent earnings, but more importantly, combined with a positive outlook.
My personal favorite is PHM given their demographic and geographic strategy.
PHM also took $100m out of their annualized cost structure with a one time $10m charge to be taken in the current quarter.
Diesel profile picture
The recent high: 323. The current price: 303. If this is a correction, we are already down 6% and maybe another 3-4% to go. If it's something more serious, it might provide a new buying opportunity.
11 Jun. 2020
Agreed. Nothing really changed. We knew the economy would be bad along the journey and the possibility of 2nd wave. I'm not talking about the retailers who rushed into airlines, gaming, Hertz recently, but the real power behind this rally. Considering all the money on the sideline, I see this as an opportunity too.
I personally this is the start of another correction. Not saying it's going to be 30%, but sentiment changed so fast. That now people are scrambling to figure out what exactly this sell of is. Is this just a one day bounce? 3-5% more to go? Or a bull blown 10-20% correction. Leaves me scratching my head trying to figure out what's going to happen next. NASDAQ hit 10k and bouced down. Personally I think the market top was yesterday. I sold out yesterday and am in 100% cash. So instead of shorting I'll just wait things out and see what happens in the next few days/weeks. I'm perfectly content right now with where I'm at. This market is still not buy and hold. And won't be until the virus is completely gone. And that may be a couple years from now. Seeing the Vix spike the way it did, is worry some.
OptionLover profile picture
Check AZ hospital occupancy for COVID19, I heard it ran out spaces!
OptionLover profile picture
Travel went up too fast, now it should tank fast!
Chris Valley profile picture
Like Santa Claus! Down the Summer Chimney! HOHOHO!
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