In The Playbook from Gravitational Edge on July 18, we discussed that investors seem to have a conse...
Did Goldman Sachs Buy the Highs?
07/26/2012 10:25 am EST
Goldman Sachs jumped on the bullish bandwagon for homebuilding stocks Monday, but Wednesday’s disappointing news on home sales pushed this sector lower, suggesting that a better buying opportunity still lies ahead.
New home sales dropped 8.4% in June, to the lowest rate in five months. The percentage decline was the highest since early 2011. Housing had recently been one of the economy's few bright spots.
There were some good news, as home construction in June hit its highest level since October 2008, and homebuilders' confidence rose to its highest level in five years. Nevertheless, the homebuilding stocks were hit hard Wednesday, and volume was heavy.
The strong volume last October was a clear sign that the homebuilders had bottomed. The housing data improved early this year, but many analysts stayed skeptical about the upside potential of home construction stocks.
But the sentiment certainly has changed, as many are projecting that housing prices will rise and that the housing market has turned the corner. Despite the 25% gain already this year in the SPDR S&P Homebuilders (XHB), Goldman Sachs joined the party on Monday, concluding that they “see this as the beginning of a longer positive trend in housing-related equities."
Last month, I discussed in detail the boom and bust cycles of homebuilding sector. The heavy-volume decline Wednesday should signal a further correction, so those long the homebuilders should keep a close eye on their positions.
Chart Analysis: The SPDR S&P Homebuilders (XHB) has a 3% to 4% position in most of the major homebuilders. It peaked in May at $22.43. The daily chart shows the lower highs (line a), as XHB peaked last week at $21.85.
- There is next chart support at $20.64, with the $19.50 area to follow.
- The 38.2% Fibonacci retracement support from the October lows is at $18.53
- The relative performance has dropped back below its WMA, but is well above the stronger support (line b).
- The heavy volume last October (see circle) was very bullish, and Wednesday’s high volume is likely to lead to a further correction.
- The daily on-balance volume (OBV) has now dropped below its WMA, and the weekly OBV (not shown) has been below its WMA since April.
- There is strong resistance now in the $21.40 to $21.80 area.
PulteGroup (PHM) had an impressive rally from the June lows at $7.63, hitting $11.48 last week. This was a gain of over 50%. This week’s close is likely to be below the past two weeks' lows.
- The major 38.2% Fibonacci retracement support is at $8.35, with the 50% support at $7.39.
- The weekly relative performance or RS analysis turned positive last fall, when the downtrend (line b), was broken.
- The RS line has turned lower, but it did confirm the highs, and is above its rising WMA
- The weekly OBV formed a negative divergence at the recent highs (line f), and has now dropped below its WMA.
- The OBV signaled an important low late last year, when resistance (line d) was overcome.
- There is resistance for PHM now in the $10.40 to $10.80 area.
NEXT: Tom's Verdict on 2 More Homebuilders |pagebreak|
Toll Brothers (TOL) made new highs this week at $31.34, testing the upper trend line resistance (line a). This was still well below the 2007 high of $35.64. TOL had a high in 2005 at $58.67.
- TOL is still one of the stronger homebuilders, with key short-term support at $28.36.
- A break of this level should signal a decline to the $26.50 to $27.50 area.
- The weekly RS analysis is still strong, as it is in a well-defined uptrend (line c) and did confirm the new highs.
- The weekly OBV also made new highs with prices, while the daily OBV (not shown) formed a negative divergence at the highs. It has dropped below its WMA.
- There is first resistance now in the $30 to $30.50 area.
Standard Pacific (SPF) is a smaller, $1.2 billion homebuilding company that also tested its upper trend line resistance (line e) before Wednesday’s drop. SPF traded above $7 in 2010, with a 2005 high of $49.70.
- There is next support in the $5.50 to $5.60 area, with the longer-term uptrend (line f) at $5.
- The daily relative performance has turned lower, and shows a similar topping formation as what occurred in May.
- The May correction took SPF from a high of $5.74 to a low of $4.39.
- The daily OBV had just moved below its WMA, while the weekly OBV (not shown) is still clearly positive.
- Resistance now stands at this week’s opening price of $6.25, and then $6.50.
What it Means: Later this morning, we get the June pending home sales data, which if better than expected should help support the homebuilding stocks. If the number instead is weaker than expected, there is likely to be additional selling pressure.
After trading the long side of the homebuilders since last October, our last longs were closed out in early June, so we missed this last rally. The high degree of bullish sentiment still makes the risk high, in my opinion, and the recent bullish outlook from Goldman Sachs reinforces this view.
Therefore, I will look for a setback over the coming weeks and a lowering of the bullish sentiment before buying.
How to Profit: Those long the homebuilders should have a plan in place, and decide whether wide or tight stops are the best for their existing longs.
This afternoon’s Trading Lesson will focus on the holdings of the Charts in Play Portfolio, so if you would like to get a copy by e-mail, click here.
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