Builder Sentiment Moves Housing Stocks
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Your Daily Profit

 

April 16, 2009

 

*****Housing Stocks

*****Market Reversal?

*****Banks Not Feeling Stress…Yet

 

Fellow investor,

 

The saga continues for the homebuilders. Last week, we saw the first steps toward consolidation in this sector when Pulte Homes (NYSE:PHM) bought out Centex (NYSE:CTX). This came on the heels of some slight improvements in existing home sales.

 

Even yesterday, a builder sentiment survey showed an improvement among builders. That got investors excited for this morning’s housing starts number. Unfortunately, the optimism was misplaced. Housing starts came in below expectations for March.

 

Of course, this relates directly to Hovananian Enterprises (NYSE:HOV). Hovnanian jumped 21% yesterday to $2.27, but more importantly, it broke through resistance at $2. And it wasn’t a small break of resistance, either. The stock crushed resistance in what should be considered a breakout move.

 

There’s not much in the way of a further move to $3 a share. That would be darn near a double for Daily Profit readers who bought on my recommendation at $1.52.

 

The only thing in the way for Hovnanian is the market in general …

 

*****Just as traders were looking for a rally in the early days of March, traders are now wondering where the heck the sell-off is. It’s not that there’s anything wrong with current levels per se, it’s that stocks have gotten here in virtually a straight line. It’s just not natural.

 

To sum it up, here’s what Jason Cimpl, the technical analyst at TradeMaster Daily Stock Alerts wrote in his morning missive today …

 

Let me get this straight. The world looks to be falling apart yet banks are posting a huge profit. Recall that these are the same institutions that told you everything was fine in 2007. These were also the same institutions that said write downs would be over in April 2008. Now the same banks claim profitability. Should we believe them this time around?

 

NO.

 

Unfortunately, the market does not care what we believe. The market is going to move up or down independent of our beliefs. Right now the market still wants to move higher. Almost every indicator is pointing to a huge sell off, but the market continues to see new highs. The SPX reached 866 a few days ago. We would not be at all surprised to see it move higher.

 

That said, how much higher can it realistically go? Even if the market can bully its way up to 890, that is only a 4.6% gain. Compare that scenario to a sell off that takes us to 775, which is a 9% loss. Both scenarios are likely. The point we are trying make is that we may see some short-term upward movement, but is the reward of going long right now worth the risk of a 9% reversal?

 

*****We’ve discussed how the banks current profitability is likely a one time event as they put TARP money to work and rework loans and credit card debt.

 

I expect this will hit the stock prices eventually. And so will the results from the Treasury’s “stress tests.”

 

You probably heard that part of the Treasury’s “toxic asset removal plan” is a stress test of banks to see how they would hold up if the economy worsened. Now, no details have been released telling us how these stress tests are supposed to work. But apparently the results will be released in May.

 

My guess is this is a confidence-building ploy. In other words, Geithner will say the banks are healthy, and investors will fell great about buying them. But sometime things don’t go according to plan. I would expect investors to lighten up on their bank holdings ahead of the stress test results.

 

That’s it for today, I’ll talk to you tomorrow.

 

Ian Wyatt

Editor

Daily Profit

 





Posted 04-16-2009 2:17 PM by Ian Wyatt