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This Sector Is Ready to Bounce

By Jeff Clark
Thursday, July 15, 2010

Housing stocks will outperform the rest of the stock market over the next month.
 
OK, stop laughing. I'm serious.
 
Yes, I know the housing market is in miserable shape. Prices keep falling. Inventories of unsold homes keep rising. The government no longer offers an incentive for new-home purchases. And housing starts are at the lowest level ever recorded.
 
That explains why the average housing stock is down 30% over the past two months.
 
Granted, the housing sector was trading at premium prices back in May… Investors had lost their minds and were expecting dramatic results from the government's tax-credit program. Now, however, investors have gone to the other end of the spectrum and are discounting the worst of all worlds.
 
Think about it. Is there anybody, anywhere who's expecting good news from the housing sector?
 
There's no fundamental argument here. The housing sector is in bad shape, and we're a long way from seeing any sort of growth in that business. My argument is purely technical.
 
Housing stocks are viciously oversold. And sentiment toward the sector is as bearish as it has ever been. It's usually in this sort of overwhelmingly pessimistic environment that stocks experience the largest oversold bounce.
 
Just look at what happened yesterday…
 
Goldman Sachs downgraded the sector, yet all of the stocks held above their recent lows. It may not seem like that big a deal. But when the biggest gorilla on Wall Street pounds his chest and investors shrug it off, a bottom must be close at hand.
 
This chart of DR Horton (DHI), one of the nation's largest homebuilders, supports my case…
 
 
 
The decline in the share price over the past two months has created a falling-wedge formation. Stocks usually break to the upside of this pattern and often recover at least 50% of the price decline.
 
DHI and all the other housing stocks broke out of their chart patterns last week. So even though the broad stock market looks ready to pull back from its recent rally, the bounce in the housing sector is just getting started.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Pipeline stocks rewarding investors… Kinder Morgan heads a long list of pipeline plays hitting 52-week highs.
 
Euro hits highest level in two months… breaks through $1.27.
 
Bad loans still haunt small banks… southeastern bank Whitney National plummets almost 20% on credit losses.
 
Earnings today... Google (Internet giant), JP Morgan Chase (banking giant), Novartis (pharma giant).
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1096.48 +0.1% +17.6%
Oil 34.58 -0.2% +3.3%
Gold 118.23 -0.1% +28.2%
Silver 17.95 -0.1% +37.4%
US-Dollar 82.37 -1.2% +3.8%
Euro 1.29 +1.5% -8.4%
Volatility 25.14 +1.0% -2.9%
Gold Stocks 459.06 -0.3% +33.8%
10-Year Yield 2.98 -2.3% -17.2%

World ETFs
Symbol Price
Change
52-Wk
USA 109.68 +0.0% +17.6%
Canada 26.47 +0.6% +20.1%
Russia 17.73 -0.1% +1.6%
India 31.12 -0.3% +5.6%
Israel 14.10 +0.0% +27.3%
Japan 9.59 -0.8% +3.0%
Singapore 11.98 -0.3% +26.4%
Taiwan 12.05 -0.7% +11.2%
S. Korea 48.19 -0.4% +29.5%
S. Africa 57.43 +0.7% +19.9%
China 39.86 -1.5% +2.2%
Lat.America 44.08 -0.7% +26.3%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 103.70 +0.2% +5.1%
Big Pharma 61.65 +0.3% +2.8%
Internet 53.75 -0.3% +23.5%
Semis 13.24 -1.1% +15.9%
Utilities 30.21 +0.7% +7.4%
Defense 16.83 +0.0% +19.6%
Nanotech 8.65 -0.5% -3.0%
Alt. Energy 8.99 -0.7% -6.4%
Water 15.71 -0.8% +7.8%
Insurance 14.68 -0.9% +22.7%
Biotech 17.63 -0.1% +31.0%
Retail 16.30 +0.8% +12.7%
Software 21.45 -0.2% +26.9%
Big Tech 45.60 +0.1% +23.5%
Construction 11.58 -0.8% +4.7%
Media 12.03 +0.0% +37.3%
Consumer Svcs 57.03 +0.3% +27.0%
Financials 52.90 -0.3% +21.6%
Health Care 60.33 +0.3% +12.0%
Industrials 54.17 -0.2% +28.1%
Basic Mat 57.26 -0.4% +30.8%
Real Estate 49.47 -0.2% +52.2%
Transportation 76.77 -0.7% +32.1%
Telecom 19.57 -0.2% +12.9%

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