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Today's Market WrapUp 01.04.2007 Mon Tue Wed Thu Fri Goldberg Archive
Institutions
Buy Homebuilders, While Insiders Pass
With a lot of talk in press releases about homebuilders scraping along the bottom, investors would be well advised to emulate the sector’s corporate insiders and stay away. Indeed while key homebuilders have rallied since mid-July, corporate insiders have purchased but 100 shares, total. The insider selling, while not overwhelming, has been significant in some cases. The rally has been fueled by institutional purchases netting almost 18 million shares using other people’s money, and in many cases this buying has resulted in significant increases in institutional holdings of individual homebuilder stocks. These stats, collected from Yahoo Finance, are summarized in the table below.
Does the rally off of the summer bottom have much more sustainability left? With the markets closed on Tuesday, Homebuilder Lennar Corp. said its fourth-quarter results will be hurt by inventory valuation adjustments and write-offs. Lennar said it sees a quarterly loss of 88 cents to $1.28 per share after valuation adjustments and write-offs. Excluding items, fourth-quarter earnings are forecast between 70 and 75 cents per share. Analysts polled by Thomson Financial were looking for net income of $1.07 per share. "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery," President and Chief Executive Stuart Miller said in a statement. Scraping along the bottom? The preponderance of the evidence suggests that the pain in the homebuilder sector is far from over. Have the worst been reflected in the stocks already? While with trailing low P/E’s, homebuilders are a somewhat kosher choice for institutional value investors forced to find value in a market where there is none. The longer term technical view of the homebuilders is bearish. Here is the much-referenced weekly chart of the Dow Jones US Homebuilder index. As can be plainly seen, there is a completed head-and-shoulders (HAS) reversal pattern. Yet since the completion, since July, the index has rallied back to near the neckline of the pattern.
I view a bearish position against the index (as represented by a long put position or a short position in a variety of stocks in the index), is a good position to take from a long term technical perspective. Exactly where the rally will fail in the shorter term becomes another matter. The homebuilders may have put in an intermediate top about 5 weeks ago. Last week’s positive economic data from the government on new and existing home sales rallied the homebuilders even though, according to Barron’s, “the Census Bureau data does not adjust for cancellations in its compilation of house sales, which in a soft market like this one not only overstates sales, but understates inventory.” However, as of Wednesday evening, all of last week’s rally gain has been given back. Was Wednesday’s give-back meaningful? "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery," I think it was meaningful. But meaningful as it may have been, there is nothing to suggest with certainty that 5 weeks ago was an intermediate top for the homebuilder index. If institutional support comes in within the next few days, the short term upward direction of the index will be enough to provide momentum to rally the stocks to the upper boundaries of the HAS neckline. In this market a rally begets a bigger rally in spite of the fact that, "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery," While certainty cannot be provided, likelihood of an intermediate top five weeks ago may be argued by the 3-box reversal point-and-figure chart of the Homebuilder index. On Wednesday, the index completed the dreaded descending triple bottom breakdown. This is one of the stronger bearish patterns in the PAF methodology.
Shorter term, the six month uptrend must be given the benefit of the doubt, even though, "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery,"
Today's Market The Nasdaq and the transportation index – two of the market’s most recent laggards, led the market higher. Participating sectors in the rally consisted of transports, semiconductors, internet stocks, some retail stocks and biotechnology stocks. The catalyst appeared to be an analyst upgrade of Intel. Oil was whacked again along with many great stocks selling at reasonable valuations and oil now sits upon an important long term technical crossroad. As you can see in the monthly chart below, light crude oil is now at an important support level near 57.5; that is the potential neckline of a head and shoulders reversal pattern. Support is expected to occur within a couple of dollars per barrel. If not, then all bullish long term bets would have to be off.
It was conjectured a few weeks ago that the HUI gold bugs index may have entered into an impulsive up wave (Wave III of Wave 3); however this potential now appears to be bleak. The odds favor a continuation of the choppy corrective wave to continue. This is clearly shown in the chart below.
While the potential of a whipsaw cannot be ruled out, it now appears that the next intermediate term “up” wave will have to wait a period of weeks. In spite of today’s rally in both stocks and bonds, the Dow Jones US Homebuilder index was down 0.82%. Sure, organized support can come into these stocks, just as they appeared to have come into the Nasdaq just as it was in technical peril several times in the last 3 years. But one must keep one’s sanity in this environment. How to do this? Just keep repeating to yourself over and over: "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery," Have a great evening. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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