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Quiet Markets And Gathering Storms

11/21/12 08:39:14 AM
by Billy Williams

Housing has been quietly building strength, and one company is registering on the market's radar as a potential leader to rise out of the housing market's ashes.

Security:   MDC
Position:   Hold

The housing market has quietly been gathering strength, as reflected in the recent report showing that sales of previously owned homes were stronger than expected in October, with sales as high as 2007 levels just before housing began its long winter of declining sales and values. Existing homes sold at a annual rate of 4.79 million in October at levels revealing a 10.9% gain, as reported by the National Association of Realtors, as well as the 16th consecutive month of home sale gains year-over-year.

Housing has a unique place in the national economy, where it acts as the "piston" to the nation's economic engine, which branches out and touches everything from retail, home improvement, finance, and more. This latest report further indicates that the excess inventory that swelled to breathtaking heights during the subprime meltdown in 2008 have started to dry up as new buyers begin to chase dwindling supplies, raising prices in a classic example of supply & demand. (See Figure 1.)

FIGURE 1: SPX. The overall market is still in a correction and is reflecting weak price action. Currently, the SPX has traded below the lower trendline of a bearish wedge pattern, signaling that the bears are forcing price lower.
Graphic provided by:
"The Wall Street Journal" quoted John Burns, chief executive of John Burns Real Estate Consulting, as stating, "We are clearly in recovery."

And it's not just that excess inventory is starting to move into the hands of new home buyers; over the last eight consecutive months, homes have begun to rise in value, with higher price homes of $750,000 to $1 million appreciating as high as 53%. One dark spot, however, is that homes $100,000 or lower have only appreciated an average of 0.6% from last October, but that is likely due to the bulk of excess inventory concentrated in that price range.

Still, with the Fed announcing that it intends to keep interest rates down, home buyers can look forward to taking advantage of cheap rates while snapping up house bargains. The Mortgage Bankers Association has reported loan applications up 22% at the beginning of November compared to last year, with the trend continuing to rise.

With the residential sector of housing on the move to higher performance, homebuilder and mortgage originator MDC Holding (MDC) has started to register on the market's radar with improving fundamentals and technical criteria. (See Figure 2.)

FIGURE 2: MDC. Though MDC has been on a bull run and formed a flat base pattern, the market's correction proved too much for the stock as it tried to go higher but was forced lower by the overall market's momentum and gave in to the bears. However, once the company's fundamentals improve along with the market being returned to the bulls, this stock could break free and emerge as a strong leader in the next bull run.
Graphic provided by:
The company has had losses over the previous years, as most homebuilders have, but it has earned more than a $1 a share in 2012, and analysts project improved earnings in 2013 as high as 53% of current annual earnings. In addition, the company is ranked #5 out of 197 industries and is slowly gaining strength.

Looking at its price chart, MDC has been on a steady bull run until recently, when it formed a 13-week price base but failed to trade higher. Price made a quick headfake on November 1, 2012, where it broke higher on strong volume but then quickly retreated below price resistance and just fell apart over the next several trading days.

For sure, MDC has some rebuilding to do, but this is a sector that has just been crushed in recent years. Though the movement may be anemic, there are signs of a heartbeat as MDC and other residential homebuilders and mortgage originators rise from the ashes.

As night follows day, housing will recover and, if you are smart, it will be worth your while to keep a watch on MDC and other strong leaders in this sector to recover into a gathering storm and fuel another secular bull run when current housing inventories run dry.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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