Contributor Since 2010
As the market digests its recent gains MoneyShow's Tom Aspray is looking at stocks in the homebuilders sector, which is now in a seasonally strong period.
The stock market held up pretty well Monday as the S&P 500 is bumping into the 50% Fibonacci retracement resistance in the 1408 area. The McClellan oscillator, a short-term A/D indicator, has risen from a low of -285 on November 15 to a high last Friday at +140. It has now turned lower and a further pullback is likely.
A market correction over the next week or so is expected to be a buying opportunity and, of course, the challenge is to find the sectors and stocks that are likely to be leading the next market rally.
The volume surge in the homebuilding stocks in October 2011 suggested a low could be forming and the fundamental data has been very positive for most of the year. This chart of the homebuilder index, from early in the year, shows that the index typically bottoms in the October-November period and then peaks in April -May.
In the next week or so the leading homebuilders ETF, as well as three top homebuilders should drop back into their initial support zones where new buying could be done.
Chart Analysis: The SPDR S&P Homebuilders (XHB) has had a great year as it is up over 54% versus just a 14% gain in the Spyder Trust (SPY). Many may be surprised that only 26% of the ETF is invested in homebuilders with building products stocks making up over 29%.
PulteGroup Inc. (PHM) dropped back to test its uptrend (line f) on November 15 as it had a low of $14.55. PHM has since rallied back to initial resistance in the $17 area.
Toll Brothers Inc. (TOL) peaked in September at $37.08 and had a low this month of $28.50; this was a correction of over 23%.
The long-term monthly chart of the Ryland Group Inc. (RYL) shows how far these stocks have fallen from the highs in 2005-2006 when it traded well over $80 per share.
What it Means: The correction lows in the major US averages have not yet been confirmed but I would not expect XHB or the homebuilders to drop below their mid-November lows. It is also possible that they will hold up even if the overall market corrects.
For new positions a decent retracement of the recent rally will need to be fairly deep as stops need to be placed under the month's lows.
How to Profit: For SPDR S&P Homebuilders (XHB), go 50% long at $25.64 and 50% long at $24.92 with a stop at $23.84 (risk of approx. 5.7%).
For PulteGroup Inc. (PHM), go 50% long at $15.28 and 50% long at $15.04 with a stop at $14.34 (risk of approx. 5.4%).
For Toll Brothers Inc. (TOL) go 50% long at $30.34 and 50% long at $29.72 with a stop at $28.18 (risk of approx. 6.1%).
For Ryland Group Inc. (RYL) go 50% long at $31.76 and 50% long at $30.68 with a stop at $28.88 (risk of approx. 7.5%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.