From a broader market perspective, the S&P 500 continues to weaken after having violated the 1982-2000 bull market was violated two weeks ago at near 1310. This would suggest that further weakness is forthcoming and quite sharp weakness at that. But in any bear market - the rallies are sharper and more poignant, and give rise to the "hope" that a bottom is forged. Last week's "Bear Stearns" implosion is simply part and parcel of the credit unwinding that appears to have quite a bit of distance to go if we take the S&P 500 trendline breakdown into account. We have projections near 945, or a 343 point fall from Friday's close.
But having said this, we want to hone in on the Homebuilder indexes and the fact that in January of this year - they forged a rather bullish monthly "key reversal" pattern higher from major support levels. While that isn't clear on this Homebuilder ETF (XHB) chart given the short period of time it has been around - if one looks towards the S&P Homebuilding sub-industry - one would find the very same pattern and from major support levels forged in 2002. Thus, given this major technical bullish pattern - and the fact interest rates are likely to continue lower as the credit crisis unfolds - then perhaps traders will find the homebuilders a 'relatively safe' area to hide, for everyone anywhere and everywhere 'knows their fleas'. Certainly in regards to the XHB, we would very well see a sharp rally unfold upwards towards $27.50 to $30.00, which would represent a rough back of the envelope gains of +37% to +50%. The homebuilder stocks are over-subscribed in terms of short positions outstanding - which could provide the fuel necessary to get to these levels regardless of the economic backdrop. Hedge funds look for leverage, and in an era of deleveraging - certainly using the short outstanding positions to goose them higher seems reasonable. On Friday, we were buyers of XHB, Pulte Homes (PHM) and Hovnanian Enterprises (HOV).
