trade idea on homebuilder stocks

[kimchi]

I found this chart amongst the spam in my inbox:



Which shows that homebuilder stocks have historically rose just after new home prices start to fall (blue arrows).

From 1979-1982 and 1989-1992 new home prices dropped, yet around this time, homebuilder stocks also rose around 5-fold and 10-fold respectively (log-scale).

Obviously, that guarantees nothing about the future, but it provides a potential trade set-up. Real estate investors are probably just as fearful now as they were in those 2 periods in recent history, and so people may well avoid real estate shares too. I think all this provides a good set-up for a long-term trade.

I've never followed any homebuilder stocks in The US, but there's a homebuilder ETF:



The market is oversold (looking at the oscillator), but still in a strong downtrend and so while there's a set-up, I can't see an entry as of yet.

I like to use my own EMA trading channels in MS Excel, but I've used keltner channels on this chart as they're not on Stockcharts.com. This stock is currently only suitable for shorter-term shorting (IMO) and when it crosses the EMA, there's an opportunity for a short with a cover at the lower channel line. The last such opportunity appears to have been at around $35 with a target of around $30-31 from May-June.

As for longer-term, I'm looking for a bullish divergence on the MACD histogram (when the market makes a lower low, but the blue histogram makes a higher low), with a possible break-out (currently above $32) or maybe a moving buy-order just above the EMA (or more conservatively, a straight buy order at the upper channel) with a stop just below the recent low, or as a factor of the market's average true range (ATR) - 5 may be provide enough room, but with corresponding higher risk and thus limitation on position size.

Several entries and stop-outs may well occur before a possible big move, but keeping the position small should help contain risk. If you risk $5 per share, then risking 2% of account would be the max (2% of account size/$5 = #shares can afford).

I'd use a trailing stop on this (should the trade suitably advance above the entry point) as a factor of the market's ATR but I haven't decided on a suitable value as yet (maybe ATR x 5???) for a long-term trade. Once the stock advances 50% higher than the distance between the entry and initial stop point, there could be an opportunity to pyramid into the position (eg-add X% more shares while paying attention to maintain position risk below 2% after using a sensibly-placed new stop-order).

The shorter-term and longer-term basic strategies above are also a reasonable way to hedge yor positions since one tends to fade the signals of the other within different timeframes. Using both strategies simultaneously might be best on different markets within the same sector.

This isn't the way I usually trade for longer-term (I use a simple breakout and a modified RSI I've created), it's just an idea (potentially muddled and fatally flawed). Anyway, posting helps my thought-processes.

So... if anyone has any ideas or suggestions, please share them.

[pig4bill]

The early 90's is nothing like the current environment. Bad idea, imo.

[CrushinFelt]

[ QUOTE ]
The early 90's is nothing like the current environment. Bad idea, imo.

[/ QUOTE ]

It's more universal than just the housing sector. It's a typical boom-bust cycle.

[CrushinFelt]

Personally I think my main play on this is going to be KBH. Not sure if I want to wait on one more rate cut or not before jumping on this one.

[stephenNUTS]

Nice T/A with your thoughts included Kim [img]/images/graemlins/smile.gif[/img]

The bad news,is as bad/cheap/depressed as they look...a true technical bottom is usually in some form of a capitulation type sell-off(these are just bleeding to death now).It also seems the news is bleaker every day....BUT I like that!

Now if a capitualtion sell-off were to happen ,I would step up to the plate big-time myself,as I am a contrarian tradrer by heart

I also see you use the stockcharts.com free service,that is a great site....but I have seen stocks hover in the over-sold camp WAAAY longer than expected,and anyone doing an "anticipation" trade to date has been disaapointed so far,except for some dead cat bounces here and there.

However TWO positives are glaring out at me:

1.With everything negative but the kitchen sink being baked into this sector, a catylyst such as another rate cut in a few weeks could give them a nice releif rally

2.And on the technical side of the charts you displayed,I LOVE that the MACD looks like it wants to curl up/cross....and maybe lead to a nice rally as well.

Either way,bottom fishing can always be a double edge sword.You can be a genious or an idiot a year from now,but I dont see you getting hurt(just keep a tight downside exit plan).
A solid short term bounce/rally is MUCH more likely than their continued slide or a huge type rally....esp. if some of the money that has poured into the tech sector the last few months,which will eventually result in profit taking.... With the usual WS sector rotation, the home builders are a prime candidate for some new $$$$ input IMO

GL,
SF [img]/images/graemlins/cool.gif[/img]

[kimchi]

As I said in my post, I believe I see a good set-up, but I don't see any entry at the moment. I'm not buying anything yet. There's no way I'm buying something in a downtrend!

I want to place a limit order at a point where an uptrend has been confirmed - some way off in this particular market. This order can be moved down if the market continues with the current trend. Problem is this ETF isn't available from my broker, and so I'll have to search for an equivalent.

[kimchi]

[ QUOTE ]
2.And on the technical side of the charts you displayed,I LOVE that the MACD looks like it wants to curl up/cross....and maybe lead to a nice rally as well.

[/ QUOTE ]

Yeah, it looks like the bears are running out of steam for the time being.

Since the stock is in a strong downtrend, but there's a cross-over brewing, I am waiting for something like the following:

1 - The fast MACD line will x-over as the stock rallies close to the EMA.
2 - The stock will then decline to a new low.
3 - MACD histogram will show a bullish divergence as it traces a higher low.

By the time (IF) the price confirms the divergence, I should hopefully have been stopped in.

As always, I'm not doing anything until all my ducks are in a row.

[stephenNUTS]

Kimichi,

You seem to have a good grip on T/A,and that along with disciplined entries/exit points ...always make for a SOLID foundaton for any investor!

NOTE:I dont always advocate PHYSICAL buy stops/sell stops...as MM's always seem to take them out,do to the fact they are visible on their books on the buy and sell side .They also could blow right thru your stop,in a volatile rising/falling market,and not even be executed...unless you use a market order which is even WORSE!

Any good investor should always know/keep their respective gains/losses/risk tolerance on paper/mentally/etc...without having to enter an actual price in place such as a stop loss order with their brokerage firm.

Obviously if you are not reachable/unavailable for a length of time,and you dont deal with a "broker that can baby-sit your account" then that is an exception

GL,
Stephen [img]/images/graemlins/cool.gif[/img]

[spider]

Um, I would dig into the data rather than taking a chart from spam at face value. [img]/images/graemlins/grin.gif[/img]

But, let's take it at face value. A couple issues:

(1) I don't myself see a strong relationship on the graph between falling home prices and rising builder stocks. I can see it for the time around 1980 but it looks pretty weak to me around 1990 -- prices were approx flat for what looks like 3 or 4 years, where is the "peak"? And hell, this is a sample size of two!

(2) New home prices are just one aspect of the market for new homes. I'd want to base any investment decision on a variety of measures -- inventories for one. Also, I'm guessing this is just the median sales price and it'd be nice to have some quality adjusted measure of prices.

[kimchi]

[ QUOTE ]
(1) I don't myself see a strong relationship on the graph between falling home prices and rising builder stocks. I can see it for the time around 1980 but it looks pretty weak to me around 1990 -- prices were approx flat for what looks like 3 or 4 years, where is the "peak"? And hell, this is a sample size of two!


[/ QUOTE ]

I totally agree with this. However, the trade methodology is more important than the fundamental reasons for entering the trade.

[ QUOTE ]
(2) New home prices are just one aspect of the market for new homes. I'd want to base any investment decision on a variety of measures -- inventories for one. Also, I'm guessing this is just the median sales price and it'd be nice to have some quality adjusted measure of prices.

[/ QUOTE ]

I don't consider any fundamental data in my trades. The OP only takes into account the price, and completely disregards value. I couldn't care less whether it's overvalued or at a discount.

It's a trade and not an investment. It's therefore speculation on price (hopefully +EV gambling)