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It's The Season For Homebuilders

12/18/12 07:53:02 AM
by Matt Blackman

Homebuilders have had a tough slog since 2007, but lately, things have been looking up. Here's a stock that's still riding the wave.

Security:   HOV
Position:   Buy

The fiscal cliff has been a drag on stocks since the election, but lately, the markets appear to be shrugging it off. But while some stocks like techs took it on the chin, home builders have continued to rally. Hovnanian Homes is a star performer that has managed to maintain its uptrend through the whole fiscal cliff melodrama.

FIGURE 1: HOV, DAILY. Hovnanian Enterprises shows a triangle pattern and breakout.
Graphic provided by: TC2000.com.
 
As we see in Figure 1, HOV had more than doubled from $2.40 in August to north of $5.40 by mid-December. On December 11, it broke above a continuation triangle and in the process issued a new buy signal for those waiting for the pattern breakout. As a bonus, it did so on above-average volume.

Perhaps even more compelling, however, is the fact that the biggest gains by far for homebuilders come around the end of the year. According to EquityClock.com, a strategy of buying the homebuilders on October 25 and selling April 26 each year would have generated a total return of 588.6% over the last 10 years versus a buy & hold over the same period of 52%.

Decembers alone have historically been responsible for an average 8% gain. If you had owned this industry for just one month a year, you would have outperformed the buy & hold by a significant margin, earning an incredible 90+% return. See Figure 2.

FIGURE 2: HOMEBUILDING INDUSTRY. Here's the seasonal homebuilders industry chart over the last 20 years.
Graphic provided by: www.equityclock.com.
 
Will the year-end rally happen again this year? Who knows, but as traders, our job is to play the odds, and the odds of making money just went up, thanks to the triangle breakout.



Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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