Contributor Since 2010
Homebuilding stocks are setting up for a run to significant new highs in the months ahead, and now is the time to manage existing positions and look to initiate new buying.
The surprising 4.1% surge in pending home sales on Thursday caused a volume surge in the homebuilding stocks, and most closed sharply higher. It was the best pending home sales number since April 2010 and the stock market paid much more attention to this report then the somewhat disappointing data on unemployment claims.
Earlier in the week, the S&P/Case-Shiller housing price index showed a slight improvement, while the new home sales were lower than expected. In late March (see "Don't Buy the Homebuilders Now"), the daily technical studies suggested that these stocks would correct, but since the weekly analysis was bullish, it should present a buying opportunity.
As reported by the Wall Street Journal, in some parts of the country, buyers are competing for the same house through bidding wars. The paper reported that a Seattle buyer offered $23,000 above the $357,000 asking price, waived inspections, and still did not get the house.
This changing sentiment may have boosted the volume on Thursday, which indicates that the correction in the homebuilding stocks and the SPDR S&P Homebuilders ETF (XHB) is over. Even though it is not yet clear that the overall stock market correction is over, the homebuilding stocks are likely to make significant new highs in the coming months.
Now is the time to mange existing long positions in the homebuilders, and for aggressive investors, there is one low-priced homebuilding stock that looks attractive for new positions.
Chart Analysis: The SPDR S&P Homebuilders ETF (XHB) peaked in March at $21.99 and then dropped just below the $20 level (line a) three weeks ago. Since the October 2011 lows, XHB is up 75% versus just over 30% for the Spyder Trust (SPY).
PulteGroup (PHM) surged over 10% on Thursday amid volume of 22 million shares after it beat estimates for both earnings and revenues. PHM peaked at $9.69 on March 16 before correcting to a low of $7.65, but it did hold above the 38.2% Fibonacci retracement support level at $7.25. PHM looks ready to close at a new weekly high.
The daily chart of Toll Brothers (TOL) shows a broad trading range, lines a and b, so far in 2012. The upper boundaries are now in the $26 area, and TOL had a high of $28 in 2008.
Beazer Homes (BZH) is a $230 million, small-cap builder of lower-priced single- and multi-family homes in 16 states. The company will report earnings on Wednesday, May 2. The 50% support at $2.67 was tested in March.
What It Means: As I detailed in a late-February Trading Lesson, the high bullish sentiment and warning signs from the daily technical studies suggested that the homebuilders were likely to correct. The strong weekly analysis indicated that a decline would be a buying opportunity.
The weekly and daily technical studies now indicate that the homebuilders' correction is over. Therefore, it is prudent to raise the stops on long positions and plan where to take initial profits on current positions. Aggressive traders should look to buy Beazer Homes (BZH) at lower levels.
How to Profit: Aggressive traders should go 50% long Beazer Homes (BZH) at $2.92 and 50% long at $2.70 with a stop at $2.47 (risk of approx. 13%). On a move above $3.33, raise the stop to $2.64 and sell half the position at $4.36 or better.
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