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August 24, 2005

Change of Heart

For the passed two weeks, falling bond yields could not pare the decline in housing stocks, but a better-than-expected report on new home sales lit them back up today. After a flat open, the homeys exploded upward for 3-4% gains and seemed to take the broader market along for the ride. Perhaps people's perception is that the housing-driven economy still has strong legs. Personally, I think this is another case of news extrapolation whereby traders put too much emphasis on one data point. Then again, if today's report really influenced minds this way, then consumer stocks such as Best Buy and Wal-Mart would have fared better. Both were down significantly.

What traders obviously didn't put emphasis on is the fact that the median sale price of all these new homes dropped to just under $204,000, which is the lowest average price in nearly 2 years. Are builders cutting prices to fuel these sales? Perhaps fewer high-priced homes are in the mix? Neither scenario sounds particularly beneficial to premium-home seller, Toll Brothers, yet its stock lead the charge today, up nearly 4%.

Later in the day, equities slumped severely, with the broadest swing coming in the Nasdaq, which was up nearly 1% around lunchtime but closed down a half percent. Perhaps record oil prices weighed on traders' minds or perhaps it was just program trading that brought us down. Either way the failed rally today is very good news for bears.

Speaking of reversals, we watched a huge sell-off in Research in Motion today, as it sunk about $3.50 from its morning high to the closing bell. This may be a sign that the apparent short squeeze is over. I think there is a high probability of RIMM experiencing a large downward move in the next several trading days. For that matter, I think there is also a probability that equities in general will have a large down day or two in the near future. There is too much uncertainty brewing in the collective, and traders hate uncertainty. After the sharp sell-off early this year, I think traders will be more nimble to the downside once they lose faith in the bull case.

Intel has also had large downward reversal in both of the last two days. Whether this shakes the boots of the bulls will be of keen interest to me. Today's reversal left INTC well under its June support level, so unless it can muster an immediate rally, I think the stock could slip to the $23-24 range rather quickly.

Disclosure: Short RIMM, INTC; Long TOL, INTC Puts


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