Homebuilder Stocks Make a Comeback

by Ethan Roberts | April 30, 2012 11:08 am

Several homebuilder stocks made an impressive comeback this past week as four companies reported an increase in orders. Earnings losses continued — but on the upside, those losses have diminished from previous quarters. Pending sales on existing homes rose more than analysts had predicted, and several companies also reported an increase in buyer traffic.

Ryland Group (NYSE:RYL[1]) skyrocketed more than 21% higher in just two days after reporting a 46% increase in orders. In so doing, the stock also broke out above recent resistance around $21 on stronger-than-average volume.

Another technical positive: RYL pushed right through its 50-day average (blue line) with absolutely no difficulty.

Other homebuilders who also reported increases in orders were PulteGroup (NYSE:PHM[2]), M/I Homes (NYSE:MHO[3]) and Meritage Homes (NYSE:MTH[4]). All three also were up sharply on strong volume over the last two trading days of the week.

The breakout came after a monthlong pullback during which most of the homebuilders gave up a good portion of their recent gains. Because of this, the group was somewhat oversold and ready for some decent news to propel it higher.

Buy, Sell or Hold?

The Wall Street Journal suggested Friday that some of the big price increase this past week could have been the result of a major short squeeze. In recent weeks, short interest in homebuilder stocks has been rising, and short sellers might have panicked and covered their positions late in the week.

The question is, once all the short sellers have covered, will there be enough institutional interest in these stocks to sustain the move? This remains to be seen.

One thing to keep in mind about 2012’s real estate market is that a very large percentage of buyers are being denied loans during the underwriting process. So the 4.1% rise in the pending home sales index reported this past week by the National Association of Realtors still leaves me feeling skeptical, despite the fact that the index is at a two-year high.

NAR and many in the financial media keep reporting rising pending sales reports as proof that the economy, housing and employment levels are improving, but it’s shaky evidence at best. New job creation continues to lag, a new wave of foreclosures still is on the horizon, and much of the closed home sales being reported are low-priced homes being snapped up by investors with cash. Higher-priced homes continue to sit for long periods of time with no buyers in sight.

Putting all that aside, Ryland Group is a stock that I have recommended previously[5], and I continue to like it for the long term. If you are long RYL, I suggest you continue to hold. Although it is now beyond the parameters of its upper Bollinger bands (upper green lines on the chart) and could pull back, support should develop around the 20.50-to-20.75 level, where the old resistance was taken out.

Traders and option players should wait for a pullback before entering long positions or purchasing calls. On a very short-term basis, Ryland has become overbought. However, there are at least a few new reasons to feel bullish about the homebuilder group again.

And these days, housing will take all the bullishness it can get.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

  1. RYL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RYL
  2. PHM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHM
  3. MHO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MHO
  4. MTH: http://studio-5.financialcontent.com/investplace/quote?Symbol=MTH
  5. I have recommended previously: https://investorplace.com/2011/12/homebuilder-stocks-buy-ryl-bzh/

Source URL: https://investorplace.com/2012/04/homebuilder-stocks-make-a-comeback-ryl-phm-mho-mth/
Short URL: http://invstplc.com/1nBU6kk