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The 2-year chart of the DJ US Home Construction Index shows that the index may have topped in July of 2005. From July to October of 2005, the index suffered some serious technical damage as the homebuilder index suffered a drop of about 30%. Since that time the homebuilders recovered only about one-half of the drop off the summer high. The index now sits just above its 50 and 200-day moving averages and is at a critical technical position.
What is different in the action of the homebuilders now versus a few months ago is that there is a difference in performance between the builders. This disparity in performance ranges from healthy and bullish charts to strictly bearish as depicted in the chart of Beazer Homes (BZH), versus that of William Lyon Homes (WLS). There may be some regional effects that are being reflected in the stock charts as Lyon Homes primarily operates in Southern California, San Diego, Northern California, Arizona, and Nevada. These areas are generally those most associated with the real estate bubble in the western US.
Some better perspective on the homebuilders may be gleaned by viewing the long term chart of the index from January of 2000 to the present.
As with the shorter term chart, it is clear that 800 is an important technical level for the homebuilders. A decisive break below the 800 level would signal the end of the bull market in homebuilding stocks. Yet, it is also relevant that in their bull run from 200 to over 1000, the homebuilder’s index has suffered several corrections that were similar in magnitude as the recent correction off of the summer of ’05 high. Retail The Retail Holders ETF sits about where it did in early 2002 at about 97 – a key technical level. Although it spent a brief moment above 97 as it surpassed 102 in July, the 97 level has acted as resistance three times in the past between 2002 and the present. The blue up support line is a key technical level. The index now sits practically on top of the key support/resistance level of 97. If 97 acts as support, that would be bullish for retail, and if it acts as resistance, then the next key level would be the blue support trendline.
Within the retail sector, major department stores have been a consistent market leader. There are now several department stores, including Federated Stores (FD), JC Penny (JCP), Nordstrom (JWN) and Sears Holdings (SHLD) that are now at or near key technical levels where their near term action may prove crucial to the behavior of entire retail sector. Federated Stores The one year daily chart of Federated Stores (FD) seems to suggest that it probably wasn’t too early in September to say hello to the bear market in consumer related stocks.
After suffering a correction from August to late October which took FD from 78 down to 58, the stock whipped the bearish with a bear market rally back to 70. Since that time FD has formed a descending triangle whose support level is at 64. A break of support at 64 would probably result in a visitation of the May/October low of 58. Note that in addition to the descending triangle, there is a convergence of the long, intermediate, and short-term moving averages and this suggests that the longer term behavior of Federated may be tipped off by the short term behavior of the stock. A decisive break above the converging moving averages and descending trendline would, of course, be bullish and suggest that the July highs may be revisited. JC Penny Co. Inc. The long-term monthly chart of JC Penny (JCP) provides some long term perspective on the retail rally.
While JCP has rallied from about 7 to almost 60, it now sits about 20% below its 1998 high. In 1998, JC Penny paid $2.14 in dividends, versus the current $0.50 per share. If you think JC Penny is ever going to pay over $2.00 in dividends, you are dreaming. Note that the monthly trading volume in the stock is diminishing and this could indicate that demand for the stock is also diminishing. Below is a one-year weekly chart of JCP. After a late summer swoon, JCP has rallied to near its summer high at about 57.5. However the rally appears to have been suspect, having occurred with several distribution signals. Note that during the rally, there were 7 down weeks versus only 5 up weeks. Four of the DOWN weeks occurred on greater than average volume whereas only one of the UP weeks (the first) occurred on greater than average volume. It is also relevant that the early summer 52-week high occurred on rather anemic volume. Since that early summer high, there was a preponderance of high volume weekly sell offs in JCP stock. A decisive close above 57.5 negates the bearish signals.
Nordstrom Inc. For all the bullish talk about high-end retailers, Nordstrom (JWN) has only been in a 6 month trading range. It has tried 3 times to break out of the trading range whose upper resistance is at 37.5. Even though it almost made it to 39, it may have been turned back recently. JWN now sits right at the top of its trading range, where a decisive break above would suggest a bullish target price of 43.5. A break back into the previous range would suggest a target price of 31, which is at the lower end of the trading range.
Sears Holding Corp. Finally, there is no better poster child for this bull market than Sears Holdings. It’s a retail stock that is a “play” on real estate, with a celebrity CEO, and a major acquisition and a lot of support on The Street. With all of the positives for the stock, to me, it is just a rather mediocre store.
After topping at 160 in the summer, Sears swooned together with the other retailers. Yet while the other major department stores rallied recently, Sears remained locked in a trading range between 115 and 125. A close below 109 would indicate an end of the Sears/K-mart stock mania. A break above 127 negates this conclusion. Sears is now a retailing laggard. Today’s Market Stocks were little changed today as until New Years, the stock market is home alone. After correcting, the action in the precious metals market suggests that they are in a bull market. Gold Corp., a stock that I own, broke out into new high ground today on more than 2 times a normal day’s volume. This should spawn a new group of momentum buyers and this should be short term bullish. Recently there was a cup-with handle breakout for the Gold Bugs Index ($HUI). The swing trading price target is equal to the distance from the bottom to the top of the 2-year trading range. I think that the price of gold is reflecting the debasement of currencies on a worldwide basis. This also explains the so-called “strength” in the dollar.
Have a great New Year. Martin Goldberg
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