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August 26, 2005

Focus on homebuilders, Fri., August 26, 2005, 8:48 AM

After Wednesday's powerful New Home Sales report, which sent the U.S. homebuilder stocks 'up with a bullet', the rocket soon ran out of fuel. That happened in spite of incredibly strong operating results and forward guidance by industry leaders this week. Why, you ask? Simple. Because there are more sellers than buyers!

There are going to be plenty of sellers when: (1) these stocks have already enjoyed a terrific run, and traders who are cognizant of overall equity market conditions are quick to take profits, (2) recent orders for new homes could dry up if mortgage rates increase, and if existing home sales continue to be sluggish, (3) it's now learned that median home selling prices dropped this month almost -10 pct, which is huge, (4) there is a huge gap between the price of homes today and the disposable income needed by buyers to service the mortgage debt and operating costs and taxes, (5) most new homes are built remote from where people work, and the cost of driving to work and back daily is a real concern to the majority of potential home buyers, and (6) etc.

Homebuilding -USA interactive chart link

30-minute data charts:

Monthly data charts:

Traders who are long the homebuilders " including the Extra-Year Traders (i.e., long-term traders) " ought to be careful to protect portfolio positions. At the top of every cycle for these stocks, the corporate news is always superlative, and the PE multiples always sit at highly attractive levels.

Remember: falling share prices mean there are more sellers than buyers.

Posted by Posted by Bill Cara on August 26, 2005 08:48:50 AM | Category: 25 Cons Discretionary