Building on the Housing Rally

Analysts may not like this stock, but options traders sure will

   

The housing market appears set to continue its run as the initial housing data for the week, the Case-Shiller 20 City Price Index, rose 3% against expectations of 2.5%.  We’ll get a fuller view of the data as the week progresses with New Home Sales and Pending Home Sales reports hitting the tape on Wednesday and Thursday respectively.

In a perverted way, the increase in housing activity in the Eastern Corridor, as a result of “Super Storm Sandy” may actually help with the construction numbers.  While this activity may help goose the numbers, it shouldn’t be lost that the housing industry has been showing signs of improvement that are more than just a flash in the pan.

I’ve been all over the housing trade for the last six months and still see enough signs to believe that the bullish trade is still strong for a number of these companies.  The bullish trend has catapulted the SPDR S&P Homebuilders ETF (NYSE:XHB) ahead of the market, but the real opportunities lie within the companies that make-up this strongly performing ETF.

One of the companies at the top of our bullish list is Masco (NYSE:MAS).  Masco is a building supply and company that focuses its efforts on supplying products like cabinets, plumbing, decorative architectural products, installation services and other specialty products.  In other words, it’s a Swiss Army Knife of homebuilding supply.

MAS is one of seven homebuilding-related companies (33 in total in the XHB) that are breaking to new 12-month highs, a bullish catalyst in itself given the fact that traders are attracted to breakout names.  To put this into perspective, only 8% of the S&P 500 companies are breaking to new highs.

What makes MAS stand out as a bullish trade is the contrarian picture that surrounds the stock.  The stock is trading more than 20% higher over the last three months while the SPX is flat for the same period. For the year, MAS is up 60%.

Despite the strong fundamental and technical picture for MAS, the analyst community has a buy rating of only 11%.  That’s right, one of the better performing stocks in the S&P 500 only has 11% buy recommendations by analysts and 78% “holds”?  Given the performance of MAS shares, this will surely change as analysts begin to upgrade the stock headed into 2013.

MAS 11 27 12 300x207 Building on the Housing Rally
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The chart is supportive of a continued rally as MAS just broke above what had been technical resistance at $16.50.  Typically, chart resistance levels like this turn into support for the shares after a breakout, meaning that MAS should see some resilience if the market runs into more selling pressure.

For the time being, I believe that a year-end target of $20 is within reason for MAS, especially if the housing data to be released during the next few days continue the positive trends they’ve set over the last six months.

Short-term traders can buy the stock at current levels and expect a 10%-20% return if the shares hit our initial target of $20 A sensible stop-loss price of $16.00 makes sense as this represents a break of the chart support we’ve identified and would also represent a shift back into the stock’s previous trading range.

Options Alternative:  The MAS Jan 16 calls are selling for $1.65 per contract and appear attractive for those educated in trading options.  This option has the potential to reach a price of $4.00 or better (based on intrinsic value alone) if the stock reaches the $20 price target, potentially netting an attractive return for a short-term trade.

 

We can’t reveal the source of this trade. But who is Trader X?

You’ve seen Trader X on CNBC, Bloomberg TV and Fox News Channel.

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Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.

But Trader X’s privileged insight means he needs to be careful. He must act anonymously. While his identity can’t be known, Trader X will pull back the curtain to the trades he’s discovered.


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