May 1st, 2006

Homebuilders and Google: A Bear’s Perspective

If you don’t pat yourself on the back, who will? Especially if you’re essentially speaking to yourself through blogging.

Homebuilders

So did you see what happened to homebuilders today? If you exclude the two stocks in the group of 21 that increased, the remaining 19 stocks declined an average 1.4%. The largest declines were Brookfield Homes (3.76%) and Toll Bros. (3.02%). The action of all 19 stocks in IBD’s Residential Builders Industry Group includes:

4/28/06 5/1/06 Change
BHS Brookfield Homes 46.60 44.85 -3.76%
TOL Toll Brothers Inc 32.15 31.18 -3.02%
HOV Hovnanian Enterprises A 39.77 38.78 -2.49%
MHO M/i Homes Inc 43.17 42.16 -2.34%
CTX Centex Corp 55.60 54.41 -2.14%
PHM Pulte Homes Inc 37.35 36.60 -2.01%
MTH Meritage Homes Corp 65.58 64.27 -2.00%
KBH Kb Home 61.57 60.66 -1.48%
HXM Homex Development Corp 38.32 37.80 -1.36%
MDC M.D.C Holdings Inc 57.78 57.06 -1.25%
NVR Nvr Inc 755.00 746.00 -1.19%
RYL Ryland Group Inc. The 63.11 62.43 -1.08%
LEN Lennar Corp Cl A 54.93 54.37 -1.02%
SPF Standard Pacific Corp 31.71 31.39 -1.01%
DHI D.R. Horton Inc 30.02 29.74 -0.93%
OHB Orleans Homebuilders Inc 20.72 20.55 -0.82%
DHOM Dominion Homes Inc 10.20 10.13 -0.69%
WCI Wci Communities 25.63 25.50 -0.51%
BZH Beazer Homes Usa 57.63 57.37 -0.45%
TOA Technical Olympic Usa Inc 21.00 21.22 1.05%
WLS William Lyon Homes 100.05 108.90 8.85%

I bring this up for three reasons:

  1. I first wrote about the homebuilders on October 11, 2005 just as they were completing what has since turned out to be the first shoulder of what has since turned out to be a major top.
  2. On March 7, 2005, in a posting titled “Selling Homebuilding Stocks Short?”, I wrote “If charts like the one above were flipped upside down I would have no hesitation saying (and have often said just so) that “a breakthrough of the resistance level triggers a buying opportunity. In this situation, would a breakdown of the support level not indicate a shorting opportunity?” I included charts of those stocks that looked then most promising as short sales.
  3. To reemphasize the importance of industry group in selecting stocks. There was only a 10% probability of having a winning stock (one of the two out of 19) if you decided to buy into the industry. So your odds of beating your benchmark average (mine is the SP-500) are improved if you add stocks in industries that are in favor and reduce or avoid stocks in industry that appear to be weakening (I haven’t owned any homebuilding stocks since last summer).

Google

….is not the hot item it was throughout last year. I issued a warning on GOOG in my November 25 and revisited the stock in January 12 and January 20. Based on today’s action, a clear warning is worth reissuing today:

The chart is starting to resemble, at worst, a double top and, at best, a descending triangle or channel; we will know better when as it returns to the resistance support trendline at approximately 330, or nearly 17-20% below today’s 398 close. It’s impossible to say today what will happen then but it is safe to say that GOOG is a stock only true gamblers would be interested in.

True, one can make money playing the intermediate swings as GOOG constructs either a consolidation or a top pattern but it’s volatility makes for very long odds against making money (except perhaps if you play the stock’s options).

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