March 15th, 2008

Industry Groups: Homebuilders

I’ve been writing about a decline to around 1150 on the S&P 500 since early February, reiterated it several times since then, even including some comparison graphs to previous crashes in my March 1 posting. So I know this is going to sound like a dichotomy (“a division into two usually contradictory parts or opinions”: American Heritage Dictionary) but, even though the market looks like it’s going to sink even further, it never hurts to look for industry groups building bases for possible future moves.

As a matter of fact, this is where I’m now stalled in writing the book I hope to finish, “Run with the Herd”: zeroing in on industry groups on the verge of breaking out. A core principal in my investment philosophy is the belief that:

The price movement of individual stock is 50% influenced by the market, 30% by the industry and the remaining 20% by factors unique to the company.”

The stock market’s influence is nailed in my Market Timing Indicator (MTI). I’ve got the individual company selection principals down. But establishing a process for zeroing in on Industry Groups is still alludes me. I’m now looking to develop my own methodology but in the past I’ve piggy backed on IBD’s ranking system for their 197 Industry Groups (see, for example, my article about energy stocks on March 23, 2007).

I bring that up because even though the market is down over 15% from its peak with no end to the decline in sight, even though housing is flat on its back with over a year’s worth of inventory and home prices declining and foreclosures increasing around the country it’s interesting to note the industries that appear to be moving up significantly (50 positions or more) in ranking among all 197 Industry Groups:

Note that the homebuilders, the Building-Residential/Commercial Industry Group, have moved up to 22nd ranking, up 91 from last week and 163 positions since December 21 (in other words, the group was ranked 185th that week, nearly at the bottom). Added to that are two other construction related industry groups that have up (marked with black arrows), the A/C & Heating Products and Hand Tools.

Stocks in another sector of the economy, transportation and shipping, also appear to have moved up in ranking (marked by red arrows).

When it comes to the stock market, the health of the market trumps rising industry group ranking so it’s these stocks should not be bought now. If you were to do a Google search of this blog for “homebuilders” you’d see I wrote negatively about the group over 6 times in 2005-6. But times and valuations have changed. Homebuilders are down over 60% from their 2005 peaks. So when the market signals that it has stopped declining, perhaps the devastated homebuilders, may be one of the groups first to respond.

It takes a long time for bases to be built and many of the stocks in the group, rather than building houses are now building bases. I’ll be watching this and screening individual homebuilders for good base patterns and, later, for breakouts.

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