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SECTOR INVESTING


DRI, Housing, And Comebacks

11/14/12 11:30:29 AM
by Billy Williams

Housing was devastated by the subprime crisis in 2008, but is this beaten-down sector ready for a comeback? One stock may tell you.

Security:   DHI
Position:   Hold

Positive economic numbers are being reported, but one segment of the economy may be ready to make a significant comeback in the not-too-distant future and carry the rest of the economy out of the slump it has experienced in the last few years. The US housing market has been on the mend after serving as an albatross around the neck of the rest of the market due to the massive inventory of unsold homes as well as the sea of defaulted mortgages.

So why should you watch housing, and how does it help you predict what will happen in the stock market?


First, the stock market is a leading indicator of the underlying economic growth. However, housing is the piston of that underlying growth by providing jobs for the construction of the homes, the purchase of raw material for that construction, rising sales in indirect markets that serve housing such as do-it-yourself projects provided by companies like Home Depot, the furnishings purchased for the new homes by their owners, underwriting new mortgages, and more.

Housing touches all segments of the economy on both horizontal and vertical levels.


FIGURE 1: DHI. DHI's stock was decimated from the 2008 housing crash and has spent years trading downward and sideways until just recently, where it reversed course and headed upward.
Graphic provided by: www.freestockcharts.com.
 
Given the importance that this economic segment has for the rest of the country, and the world, for that matter, then your inner contrarian should be intrigued at how beaten down that housing has been by loan defaults and foreclosures that spread like an aggressive virus through the financial system. More important, you should be intrigued at how the excess inventory of homes that lingered around the country are now beginning to find its way into the hands of eager new home owners.

These combination of factors show that housing is beginning to recover as the building sector is currently ranked #1 out of 33 sectors and its industry group for building/commercial group is #3 out of 197 industries. In 2008, this segment of the market was gobsmacked due to the subprime crisis and has traded sideways or downward ever since.


FIGURE 2: DHI. For the last year, DHI has found support along the 50-day simple moving average (SMA) and been steadily trending upward but recently fell short of earning estimates on November 12, 2012. Its fundamentals are improving, which make this a stock to watch as it gains a foothold back in the market as well as give an indicator on how the stock market may perform in the near future.
Graphic provided by: www.freestockcharts.com.
 
Now, companies like DR Horton (DHI) (Figures 1 and 2) are starting to show signs of a heartbeat again and potentially move center stage to lead the market higher. The company has already shed a lot of the excess inventory that has been the anchor hanging around the neck of the whole industry and their earnings are starting to show some stability since the beating the whole sector took back in 2008.

DHI is worth watching and to consider taking a position in, but it might be better to wait for its numbers to improve before taking a full position.


On November 12, 2012, DHI announced its earnings, and while they showed the company is making progress in regaining its position in the marketplace, they still fell short of estimates. Earnings are at 17% quarter over quarter and the return over equity (ROE) is a paltry 3%, well below the minimum that any momentum trader would consider on a fundamental basis. But for an aggressive speculator, nibbling at a few shares here and there might pay off big in the future.



Billy Williams

Billy Williams has been trading the markets for 22 years, specializing in momentum trading with stocks and options. You can read his commentary at www.StockOptionSystem.com where you can get a free report "Fundamental Trading Keys For The Aspiring Trader".

Company: StockOptionSystem.com
Website: www.StockOptionSystem.com
E-mail address: stockoptionsystem.com@gmail.com

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