US Market behavior says sell

http://cbs.marketwatch.com/news/story.asp?siteid=bigcharts&dist=bigcharts&guid=%7B6CD9CF4F-45CA-4FB6-9332-56D4396D75B3%7D

TOMI KILGORE’S MARKET MAP

Don’t fight the market

By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 5:54 AM ET Jan. 12, 2004

Commentary: Market behavior says sell homebuilders

NEW YORK (CBS.MW) — It’s better to follow the market than to fight it, no matter what the fundamentals may be telling you at the moment.

Some investors are contrarian by nature, for fear of buying the high or selling the low, while others are stubborn, for fear of abandoning a trend too early.

In the homebuilding sector, investors seem to be a little bit of both.

For the second time in a month, the homebuilding sector was knocked lower by negative comments from first, a mortgage services company, and then second, a homebuilder.

Both times, Wall Street analysts and investors rushed to the sector’s defense. They said that a drop in mortgage refinancing didn’t affect home buying, and a drop in new net orders at Ryland (RYL: news, chart, profile) was company specific.

The sector did rebound two sessions after Washington Mutual’s (WM: news, chart, profile) warning in early December, but the group that defied the bear market could not completely rebuild what it had lost before the next decline began.

They bounced again a day after Ryland’s warning, as a number of rivals announced strong order growth and a fall in long-term rates gave hopes for a renewed mortgage frenzy, but they are still no where near getting back what they lost in the last decline.

Be it due to valuations, fear of rising interest rates, or just plain gravity, investors are now hitting the sell button first, and then asking questions later. And the bad news is hurting more than the good news is helping.

It may be time to stop fighting the market and leave the sector, no matter how good it has been in the past.

Use the market, don’t fight it

Investing is about using the market to make money, not about making money the way you think you should.

When you play Black Jack in Las Vegas (I was just there last week), you don’t try to get as close as you can to 21, you play to beat the dealer’s hand.

Fundamental analysis is just one way to reach that goal. The other is studying supply and demand in the market place; or in other words, behavioral analysis; which by any other name, is technical analysis.

Neither is more important than the other. Sometimes, however, one stops working, so you must rely on the other.

Many contend that homebuilder stocks are still in good shape. The economy is growing, rates are expected to remain low for a “considerable” period and most homebuilders continue to report orders/earnings that are strong and beat expectations.

Meanwhile, the stocks in the sector have arguably already begun declining.

Are they seeing something down the road that the analysts can’t?

A reversal of fortune?

The charts of four of Friday’s most-active homebuilders are all suggesting a reversal has already begun.

Justified or not, Pulte (PHM: news, chart, profile), Lennar (LEN: news, chart, profile), Centex (CTX: news, chart, profile) and Toll Brothers (TOL: news, chart, profile) all took hard body blows in mid-December after WaMu’s warning. They each spent the next two weeks or so recovering, but neither could muster the strength to reach their early December highs.

(See interactive java charts for Pulte, Lennar, Centex and Toll Bros.)

Then, the sector collectively began a run of declines starting just before the end of 2003 culminated in last Thursday’s drop off. While they all bounced off their lows into Friday, the damage may have already been done, as the stocks’ respective lows surpassed December’s lowest points.

For those stocks to reverse the low high, lower low trend, they must above their respective late-December highs of $48.27, $99.94, $111.84 and $41.26.

And Ryland’s chart? That’s as classic a triple-top reversal as I’ve seen, all the way down to last Thursday’s sell gap (when the intraday high failed to overlap the prior day’s low), which should now act as strong resistance.

Perhaps WaMu’s and Ryland’s warnings really aren’t indicative of the sector’s current fundamentals, but the reaction of the stocks suggests the market may no longer care.

Fear never rides a tortoise out of town. When you start seeing stocks falling at hare’s pace, it’s a sign that investors have something to be afraid of. Whether they’ve become uncomfortable with the slowing pace of gains, they see a negative catalyst on the horizon or their positions are just too loaded up in the same direction, supply has taken the lead over demand.

If the story the charts are telling is true, watch how quickly the fundamentals become interpreted in a negative fashion by even the bullish analysts.

Perhaps interest rates are at a point where they are no longer low enough to get someone to buy a new home. Maybe the home prices themselves have to be lower.

The fall in the 10-year Treasury yield ($TNX: news, chart, profile) to a 3-month low Friday (read more) helped give the sector a lift, the fact that it was prompted by much weaker than expected jobs data may not necessarily be a positive.

Knowing when to fold ’em

Wall Street is different from Vegas in that the odds are not stacked against you, and you don’t have to be in it to win it.

It is similar in that it’s important to know when to walk away, whether you’re winning or losing. You can’t lose it if you’re not in it.

There will be another chance, be it in homebuilders again or in some other sector. There’s no reason to have to stay in homebuilders till the very end, especially when they’ve stopped doing what lured you to them in the first place. You can always get back in if they prove you “right” down the road.

Tomi Kilgore is a reporter for CBS.MarketWatch.com in New York.

Cheers
Mel