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March 23, 2006

There’s No Place Like Homeys

Last night KB Home posted impressive first quarter numbers and lit a fire under the home builder sector. KBH shares lead the pack today with a 5% gain compared to a nice 3% gain for the homeys as a group. Naturally, traders focused more on the earnings win than on the statement by KBH that cancellation rates continue to climb and total orders continue to decline. Of course, we were warned about those trends last month. It's old news, so it doesn't count any more, right?

Perversely, Building Materials Holding rallied along with the home builders. The homeys may be able to squeeze a few more cents per share into earnings due to higher year-over-year home prices, but the fact remains that total orders are on the wane, and that is not good news for BMHC. I don't think these facts are totally lost on the market, though. This month's rally in BMHC shares has been met with steeply declining volume. With today's move, BMHC is also performing yet another back test of its moving average. Obviously, I was a bit premature in re-opening my short, but I am still confident it will evolve into a profitable trade.

stock chart

Speaking of bad timing, yesterday's cover of my Apple Computer short was also premature. Apple shares were knocked for another 2% today. Apple has now fallen in 6 of the last 7 trading sessions, and there are no signs of support coming into the stock. The situation illustrates one of the many difficult decisions facing traders: when you realize that closing a position was a mistake, under what circumstances do you re-open the trade even at a worse price than your previous close?

Personally, I believe mistakes have a way of compounding themselves, so I will rarely chase a stock in this manner. It's a matter of knowing your own weaknesses and controlling the emotions associated with these weaknesses. By controlling the emotions that make you weak, you minimize the chances of making big mistakes. One of the questions I ask myself before each trade is how I will react to being wrong. The thought processes invoked to answer the question reveal much about my confidence in the trade, and I have vetoed many poor decisions with this method.

Back to the action... Newmont Mining shares posted their first solid gains in a week with a 2.5% pop. It is interesting to see NEM shares so strong while gold price remains flat. Silver, on the other hand, popped another 2% on expectations that SEC approval of Barclay's silver ETF is imminent. At the present time, though, I do not see any actionable developments, and I intend to sit tight on current positions.

One item that makes me reticent to add to metals-related positions is the dollar's strength. The greenback has put in quite a bounce this week, and it seems at least for now, the Fed's tough talk has lent a supporting hand to their paper. I am on keen lookout for the emergence of whatever crisis will lead to the Feds throwing in the towel on their tough talk. Once they give up on the rate hikes, metals should rally strongly, and I want to be part of that rally.

Disclosure: Short BMHC; Long NEM Calls


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