Stock Market Crash! Blog

The Homebuilder Stock Crash: I Told You So

On April 14th, I made a post called "How To Profit From the Interest Rate Ascent (Pt. 1)", in which I exposed an important bearish head & shoulders chart pattern in homebuilder stocks as well as a corresponding bullish head & shoulders in bond yields. The bullish pattern in interest rates signified more downside in housing related stocks, as higher interest rates put a damper on the housing market. Since that point, even Alan Greenspan's conceded that "the "extraordinary" boom in the U.S. housing market in recent years is over."

Essentially, this post provided information about how to profit from the housing bubble bust that we've heard so much about. My recommendation was to short stocks that were in the Dow Jones US Home Construction Index, such as "Beazer Homes, Hovanian Enterprises, Lennar Corp., Centex Corp., Pulte Homes., and D.R. Horton Inc., to name a few."

How did my predictions fare? Why not take a look at the charts yourself:

Dow Jones US Home Construction Index, (April 14th) before:



Dow Jones US Home Construction Index, (May 24th) after:



I suggested short selling individual homebuilder stocks upon a signal that consisted of the Dow Jones US Home Construction Index breaking below the "neckline" support level at 830, giving a minimum target of 530 to be reached. A little more than a month later, and the index is now at 724, or 12.7 percent lower. According to my targets, we still have some more downside until we hit 530.

Even more dramatic were the losses accrued by the individual homebuilder stocks:

Lennar Corp, down 12.3 percent:



Beazer Homes, down 16.6 percent:



Centex Corp, down 16.6 percent:



DR Horton Inc., down 15.6 percent:



Hovanian Enterprises, down 24.5 percent:



So, you would have made some nice profits by shorting any one of these. By short selling $10,000 worth, you could have made anywhere from $1,230 to $2,450. Not bad, considering the lackluster market environment. Keep in mind, WE STILL HAVE MORE DOWNSIDE!

How have interest rates played out?

30-Year Treasury Bond yield, (April 14th) before:



30-Year Treasury Bond yield, (May 24th) after:



The importance of the Bond yield charts, is their inverse relationship with homebuilder stocks, and the strong recent correlation between the right & left shoulders and head, in their respective head & shoulders patterns. The 30-Year had soared as high as 5.3 percent, before consolidating to 5.13 percent. This seems to be a short-term consolidation pattern, as market takes a pause before resuming its trend up to 5.5 or more, as per the price target. This further upside will help propel the Homebuilders index down to the target of around 530.

Intermarket analysis is one of the most overlooked parts of technical analysis, in my opinion. Markets don't move in isolation, they all have an effect on each other. The benefit of intermarket analysis is that sometimes, one market will lead another, as was the case with the 30-Year Yield breaking its "neckline" first, foreshadowing the breaking of the Homebuilders neckline.

I expect the Homebuilders to consolidate upwards for a few days before the oversold condition is rectified.