Homebuilders Setting Up For Another Short Entry

Investment Research Dynamics

On a per structure basis, activity in multiple units starts is dwarfed by the flat to minus activity in the dominant, single unit housing starts category, which has remained stagnant at a low level of activity since hitting bottom in early 2009. The private housing sector never recovered from the housing collapse of 2006 into 2009.   – John Williams,  Shadowstats.com

The homebuilder stocks staged a dead-cat bounce higher this week.  I have been saying that the builders were very oversold and would likely engage in a sharp short-squeeze rally.   Today’s huge short-squeeze move - see this link – in the entire stock market added fuel to the homebuilder’s spike up.

I mentioned last week that the builders were due for a technically “oversold” short term bounce.  I also asserted that the builders typically rally into the NAHB homebuilder sentiment index and the housing starts report.  Finally, I said a bounce up the 50 dma was likely and a continuation move to the 200 dma was possible.

The housing starts report today was driven by starts in apartment rental buildings.  Just like during the original housing bubble, developers are going to over-build apartment buildings.  This will drive rents lower, which will drive home prices lower.  I’m already seeing some downward pressure on apartment rents in Denver and there’s several large projects in various stages of completion.  I’m also seeing many more homes offered for rent in good neighborhoods than I’ve seen in the last 4 years.

Today the DJUSHB closed at the 50 day moving average.  You can see on the graph below that the move this week was on declining volume and on less volume that the sell-off that occurred last week (white box on the graph - Click to enlarge):

The next graph is a 2-yr daily which shows the movement of the homebuilder sector vs. the yield on the 10-yr Treasury (30-yr mortgages are priced off the 10-yr Treasury):

As you can see, since the beginning of March this year, the big decline in interest rates has not stimulated the homebuilders, which reflects the fact that new homes sales are now in a downtrend.

The short-squeeze spike up this week has created the perfected set-up to either start a short position in the homebuilder stocks or add to current shorts.  My advice would be to short some stock on Monday and then wait and see if the DJUSHB moves up to the 200 dma, where I would add to positions.

Existing home sales for September are released on Tuesday and new home sales on Friday.  Those reports could be the catalyst that drive the DJUSHB back up to the 200 dma. But if the reports fall short of expectations, the DJUHSB will take another plunge lower.

This market is headed lower.  Much lower than most people realize or are even willing to contemplate.  Although the extreme degree of subprime mortgages are not available now like they were in the years which lead to the housing bubble popping, interest rates over this current period of time are significantly lower than they were from 2000-2006.   Yet, home sales running at 1/3 the level of the peak bubble years.  Stunningly, every single homebuilder I look at has inventory and debt levels as higher, or higher in some cases, as they had at the bubble peak.

My homebuilder reports - see this LINK -  will help you take advantage of the current set-up in the builder stocks.  I have detailed analysis, including an explanation of how and why the homebuilders are using misleading accounting to make their earnings appear better than these companies are really producing.  I also include a section that goes over options strategies.

The market gods have handed us yet another opportunity to make money off of stupidity and greed.