Interest rates surged Friday morning, sending ripples across the market. While banks cheered the rise, homebuilding stocks got wrecked.
The 10-year yield pushed above short-term resistance to tag 1.9% for the first time since the pandemic began. Mortgage rates are following suit, and it’s souring sentiment for housing-related stocks.
Perhaps the damage is overdone, and this is all just an overreaction. Long-time shareholders are certainly hoping so.
But, for now, traders are fleeing the space, and it’s creating nasty bearish patterns across a broad swath of charts. So I scanned the industry to find the most vulnerable-looking stocks to sell or build bearish trades on. Here are the best ones:
They all boast downtrends and are rolling over. The path of least resistance has officially shifted from up to down. So, let’s take a closer look at each chart and identify an intelligent options trade idea.
Homebuilding Stocks Getting Wrecked: Lowes (LOW)
One thing that I love about LOW stock is how well it’s behaving from a technical perspective.
First came the double-top pattern in December and January. Then we broke support and the 50-day moving average to push prices into a downtrend. After getting oversold, we bounced and failed where you’d expect. The old floor became a new ceiling, as did the declining 20-day moving average. Now, with Friday’s whack, a downswing has emerged.
The 200-day moving average is the next likely target. That leaves over $10 of potential profit, which is sufficient for today’s trade idea. We’re going with a put spread because of the favorable risk/reward.
The Trade: Buy the March $230/$210 put spread for $7.
You’re risking $7 to make $13 if LOW sits below $210 at expiration.
KB Home (KBH)
In midday trading, KB Home shares were down more than 6%, making them the biggest loser among the most liquid homebuilding stocks.
The stock is now testing critical support, placing it on the brink of a significant breakdown. Over the past year, both $38 and $39 have halted several selloffs. If the current test fails, then watch out below.
Implied volatility is spiking to the 59th percentile, making premiums ripe for the selling. We can get a higher probability of profit by using bear call spreads.
The Trade: Sell the March $44/$47 call spread for 40 cents.
Consider this a bet that KBH stays below $44 for the next month. A cluster of falling moving averages just below it should act as resistance and make it less likely that prices rise above $44. The max gain is limited to 40 cents, and the max loss is $2.60.
Homebuilding Stocks Getting Wrecked: Lennar (LEN)
Honestly, if you throw a dart at homebuilding stocks right now, you’ll hit something that looks good for a bearish idea.
But Lennar’s posture demanded a mention. Its downtrend is steeper than KBH, and it has much cleaner swings. The recent bounce resulted in another lower swing high. Prices failed to even return to the falling 20-day moving average, confirming how quickly sellers were to pounce.
LEN stock was down 4.5% at the time of this writing and closing in on the previous pivot low. What’s more, the $90 zone has been significant long-term support. So if it gives way, we could see swift follow-through.
I like longer-term put spreads to fully capitalize on what could be a reversal in the weekly uptrend.
The Trade: Buy the May $90/$75 put spread for $5.
You’re risking $5 to make $10 if Lennar shares fall to $75 by May.
On the date of publication, Tyler Craig was LONG KBH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!