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February 3, 2006

Housing Bounce

Regular readers are familiar with my musings on Building Materials Holding Corp., a supplier of materials and construction components to major home builders. BMHC shares have enjoyed a spectacular run on the coattails of the housing boom. In an 18-month period from early 2004 to late 2005, the shares soared by a factor of 6.5. It is a well-run company, and I have no qualms with its management. I have been short the stock simply because I believe it will be a victim of the slowing housing market. As a supplier to a slowing industry, its pain in the down cycle is accentuated.

Despite all the data showing slowing home sales and slowing rates of construction, BMHC shares are hanging on. Rather than collapsing ahead of the shares of the companies to which they sell, which would be typical behavior for the stock of a supplier, BMHC is still holding support on its head-and-shoulders neckline (green support line in the chart). Shorters should be careful, however. Head-and-shoulders patterns are so ubiquitously followed these days that they are as likely to produce bear traps as profits.

stock chart

A shorter-term trend line, which was previously providing support, is now providing resistance. The shares have also been denied by more important resistance... their moving average... for about 3 months now. The MA and the neckline are converging, meaning an important juncture for this stock looms.

If recent action in home builder shares is any indication, BMHC will fail its test. The next reasonable area of support would be at the gap price in the low $50s. But let's not start counting our chickens before they hatch. A significant break above the MA would negate the bear side, and although analysis would indicate an upward break unlikely, it is not impossible.

In today's action, tech stocks were the worst hit. The Nasdaq 100 got lopped for 20+ points... about 1.25%... swayed in large part by Amazon's earnings miss. Other NDX swooners include Yahoo, Bed Bath & Beyond, and eBay. Intel also cracked decisively into new low ground, falling 2%. More importantly, the NDX itself gapped below its moving average, indicating failed support and perhaps an important shift in psychology. Barring an immediate and strong reversal, we could see this index slipping to its next technical support level around 1,630... another 2% below today's close.

Housing stocks bucked the trend and managed a strong intraday reversal, helped, no doubt, by the rally in bonds. A bullish hammer put in by the DJ Home Construction Index indicates that at least a short-term rally could ensue. Therefore, Monday's action will be important for this sector, and the stocks may be further influenced in the short-run by how our government's bond refunding goes next week. I intend to refrain from further action in this sector through that event.

I'll post a new Q&A tomorrow. Have a great weekend.

Disclosure: Short BMHC, INTC; Long YHOO, BBBY, INTC Puts


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