Keep an Eye on Hovnanian

by Ethan Roberts | April 11, 2012 10:29 am

On a really bad market day, such as yesterday’s 213-point loss on the Dow, I always make an effort to look for stocks that are bucking the overall negative trend. Such stocks are showing strong relative strength and will be the first to bolt higher when the market correction ends.

The homebuilder stocks have been underperforming recently, and one stock that has really been under pressure is Hovanian Enterprises (NYSE:HOV[1]).

Hovanian is a low-price, somewhat volatile stock that I have previously noted as one of the stronger homebuilder plays[2], and one that has outperformed both the S&P 500 and its peers since October 2011.

Why the Bounce?

On Monday, HOV touched up against its 200-day moving average, which is often the place you’ll see support emerge for a stock. But of greater note is that on Tuesday, while the overall market tanked more than 200 points and most of the homebuilder stocks were crushed, HOV actually had a pretty decent day, closing up a penny at $1.99. At one point intraday, it was actually up over 3%.

It’s interesting to note that there was really no positive news on the stock. KB Home (NYSE:KBH[3]) had a minor analyst upgrade, but still finished down over 5% for the day. The other homebuilder stocks faired no better. Lennar (NYSE:LEN[4]) finished down over 7% on the day, Ryland Group (NYSE:RYL[5]) and Beazer Homes (NYSE:BZH[6]) were down over 5%, and Toll Brothers (NYSE:TOL[7]) was down 4.68%.

A look at the three-month chart below for HOV shows some interesting patterns. Note bump up against its 200-day moving average at $1.91, following a brutal 36% decline from $3 just a few weeks ago.

Click to Enlarge

Courtesy of

In addition, it looks like there was a seller’s climax last week with more than 25 million shares trading and HOV finishing the day strongly in a near-hammer candlestick pattern. This week HOV has shown the classic Doji candlestick pattern, representing a situation in which bulls and bears are fighting it out equally to see who’ll gain control.

While the Relative Strength Index (RSI) and Stochastic Oscillator are both in oversold territory, neither have turned up, so more cautious investors may want to give the stock another few days. However, don’t wait too long, because HOV was just outside the lower Bollinger bands at the start of the week, an oversold condition that usually indicates a bounce is forthcoming.

Call Options Are One Option

The May HOV calls are incredibly cheap right now. The $2 strike price shows a bid-to-ask of only 15 cents to 20 cents. At a minimum I am looking for HOV to test the recent gap at $2.30, a 15% rise from here that would return several times that on the call options with very low downside risk.

If buying this stock long, I would put a stop loss around $1.85, because once it falls below the 200-day moving average, that’s usually a sign of more selling to follow.

Although I think that most of the homebuilder stocks still have more decline coming, HOV is the one standout among the group, and it warrants further consideration.

  1. HOV:
  2. I have previously noted as one of the stronger homebuilder plays:
  3. KBH:
  4. LEN:
  5. RYL:
  6. BZH:
  7. TOL:

Source URL:
Short URL: