Tag: homebuilders

In a Double Barrel Bull Market, AI and Housing Rule the Roost

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The Federal Reserve is still talking tough via its dot-plot, which forecasts two more interest rate increases before the end of 2023. But the markets are not agreeing. My money, for now, is with the markets.

As I pointed out in my January 2023 video for StockCharts TV’s Your Daily Five, despite constant worries from perplexed traders and dark pundit banter, a credible bottom formed. Since then, stocks have risen and now look set to move higher, likely with occasional pauses. That’s because the rally is broadening out via a rapid improvement in the market’s breadth, which is accompanying the new highs on the major indexes, as I describe later in the article.

In fact, we are currently in what I call a double barrel bull market, where two major groups are pulling the rest of the market higher. The one everyone knows is AI. The other, more quiet but equally bullish, is the housing sector.

Since lots of people have missed the rally and are now playing catch up, the upward momentum will keep going for a while. Of course, this rally can’t, shouldn’t, and won’t last forever. But if history is any guide, the rest of 2023 and much of 2024 have a built in upward bias, at least based on the phenomenon known as the Presidential Cycle; whose major premise is that the Fed raises rates in the first two years of a presidential term (which it has) and lowers them in the last two years (which seems highly likely).

AI Poster Child Makes New Highs

The poster child for the AI rally is the Invesco QQQ Trust (QQQ), as it houses the large-cap tech stocks, which are moving higher based on expectations of large profits in the future from increasing automation and whatever AI eventually delivers.

Last week, QQQ made another series of new highs. But, by Friday, it looked at bit tired. Thus, it makes sense to expect some sort of consolidation. A move back to the 20-day moving average is not out of the question.

Lennar’s Goldilocks Quarter

For the past several years, I’ve written extensively about the homebuilder stocks and related sectors. That’s because this area of the market continues to move higher. Moreover, the more negative investors become on the sector, the higher it goes.

In fact, as I detail in this Your Daily Five video, the homebuilders are in what can only be described as a bullish Megatrend, which shows no sign of slowing.

Take, for instance, the recent action in leading homebuilder Lennar (LEN), a longstanding holding in my Joe Duarte in the Money Options portfolio, and a personal holding. Its most recent earnings report blew past analysts’ expectations on both earnings and revenues as the company again offered a positive outlook. Naturally, the shares broke out to a new high.

What makes Lennar’s earnings most interesting is the company’s management of its inventory – not too hot, not too cold. Moreover, the company’s Executive Chairman Stuart Miller noted that home buyers have come to accept the “new normal” status of interest rates, adding “demand has accelerated.” He concluded by noting: “Simply put, America needs more housing, particularly affordable workforce housing, and demand is strong when price and interest rates are affordable.”

In other words, unless interest rates climb significantly higher, the housing sector, from the point of view of homebuilders, is in better shape than many investors may think.

And here is something else to consider. Lennar is trading at a P/E of 9.46, while Nvidia (NVDA), the biggest benefactor of the AI trend, is trading at a P/E of 54.91.

Bond Yields Hold their Ground

Bond yields remained below their recent top level of 3.8% as 262,000 Americans filed for unemployment benefits, an increase of 17,000 from the prior week. In addition to the stable inflation pictured in CPI and the rolling over of producer prices (PPI) released earlier in the week, bond traders breathed a sigh of relief.

Buried in the jobless claims number were over 7,000 new filings in Texas, the highest number of new claims in the U.S. for the week. Let’s put this in some perspective. Based on recent U.S. Bureau of Labor Statistics numbers, the Lone Star State accounted for 7% of the total U.S. GDP. Moreover, in Q4 2022, Texas accounted for 9.5% of total U.S. GDP, which means the largest economy in the U.S. is starting to feel the pinch of the Fed’s rate hikes.

On the other hand, Texas has received the largest number of new residents of any state in the post-COVID period. All of which means that for now, even in a slower economy, there is still a tight supply of housing combined with high demand. Texas is not alone, as the sunbelt remains attractive to many people looking to escape high taxes and challenging employment situations.

This confluence of data, rising initial jobless claims, slowing inflation, and a coincident slowing of the Chinese economy has led to an encouraging reversal in U.S. Treasury bond yields, which will likely benefit the homebuilders. That’s because, with lower bond yields, we’re already seeing an increase in mortgage activity, as the chart above shows.

The 3.85% yield on the U.S. Ten Year Note remains 3.85%, roughly corresponding to 7% on the average 30-year mortgage. So, if yields remain below this level, the odds favor a continuation of the steady performance of the homebuilder sector.

Incidentally, I have expanded my coverage of the housing and real estate markets in a new section for members of my Buy me a Coffee page, where you will get the inside scoop on what’s happening in these important sectors. This crucial information complements the stock picks at Joe Duarte in the Money Options.com You can start by reviewing my extensive report on the outlook for the homebuilder sector here. 

NYAD Improves SPX and NDX Look to Consolidate

The New York Stock Exchange Advance Decline line (NYAD) continues to improve. As long as it’s above its 50-day moving average, that’s signaling stocks are back in an uptrend.

The Nasdaq 100 Index (NDX) moved above 15,000 and is due for a pause. But in this market, any pause may be short-lived. ADI and OBV remain in bullish postures.

The S&P 500 (SPX) moved above 4400 and looks set to take a breather. As with NDX, any pause may not last. Both ADI and OBV look to be in good shape.

VIX Makes New Low

The CBOE Volatility Index (VIX) broke to another new low last week as call option buyers overwhelmed the market. As I noted last week, this is probably a little too much bullishness all at once, so I expect a bit of a bounce in VIX, which will likely lead to some backing and filling in the market.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity is Increasingly Stable as Fed Holds Rate Hikes

With the Fed on hold, the market’s liquidity is starting to move sideways, which is a positive. A move below 94 on the Eurodollar Index (XED) would be very bearish, while a move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte

About the author:
Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20’s & 30’s, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website.
Learn More

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Momentum is Back, Breadth Rallies; It’s Truth Time for OPEC and Crude Oil

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The week of June 5 should be momentous as the bears who have been left behind consider whether to fully capitulate.

The stock market is back in rally mode as seasonal tendencies for a summer rally, especially in the third year of the presidential cycle, assert their influence. Especially comforting is the recovery in the market’s breadth, as measured by the NYSE Advance Decline line (see below). The US economy is showing signs of slowing, as the rate of rise in inflation is flattening.

Of course, things could change instantly, especially if, as I discuss below, OPEC does something dramatic at its June 3–4 meeting. Moreover, it’s all about whether the Fed leaves rates unchanged in June in order to see if the current flattening out of inflationary pressures is a prelude to an actual decline and what that does to bond yields.  

I’ll have more on bonds below. First, a few words about the oil market.

OPEC’s Credibility is on the Line

Last week, I suggested that shorting a dull market is not a good idea. I was referring to the nearly complete lack of bulls in the oil market and suggested the energy sector was ripe for a bounce.

As I went to press on this post, rumors were circulating that OPEC was considering a 1 million barrel per day production cut, to be announced at the conclusion of its June 3–4 meeting. This cut, if it happens, will be in addition to production cuts previously announced, which are starting to make their way through the system and could reduce global oil supply meaningfully.

Crude oil ($WTIC) rallied on June 2, 2023, on the OPEC rumors and signs that oil production is already being reduced. For example, the US Rig count fell for the fifth consecutive week. Meanwhile, Canada’s oil sands giant Suncor announced 1500 job cuts. There are also rumors that job cuts are coming in the fracking sector in the US, as the number of active crews finishing wells is also shrinking. 

Here’s the bottom line:

  • The US oil industry is dialing back production, and OPEC seems to be on a similar course.
  • If OPEC flakes out, they risk losing their ability to influence the price of oil, at least for the foreseeable future.

Watch the market’s response to OPEC’s announcement. If WTIC’s price rises above $75 decisively, then current market relationships, especially bond yields, stock prices, and what the Fed does at its upcoming FOMC meeting (June 13–14), will likely be affected.

I’ve recently recommended several energy sector picks. You can look at them with a free trial of my service. In addition, I’ve posted a Special Report on the oil market, which you can access here.

Bond Yields Test Resistance

The latest monthly payroll numbers were well above expectations, but the bond market is focusing on other signs that the economy is slowing. As I noted last week, bond yields are likely to fall once the economy shows signs of slowing and the Fed admits that it must at least stop raising rates. Here are some signs that perhaps we’re not too far from that point:

  • Dallas Fed Survey crashes, falling for the 13th consecutive month; one respondent noted: “There is nothing encouraging on the horizon.” Other notable quotes: “orders canceled,” “order volume has stalled recently,” and “seeing a massive slowdown.”
  • Dallas Fed services survey fell for the 12th straight month. Comments worth noting: “Businesses are preparing for a recession by looking for ways to cut back, which in some ways, works to create a self-fulfilling prophecy.”
  • Chicago PMI Collapses—new orders, prices paid, production, inventories, and employment fell.
  • China manufacturing PMI fell below 50, signaling contraction.
  • U.S. PMI and ISM surveys fell again.
  • China’s economy is showing signs of slowing.

Beige Book Confirms Slowing U.S. Growth

Confirming the negative news above, the Fed’s most recent Beige Book offered the following:

  • Prices are rising but are doing so more slowly.
  • New York and Philadelphia registered slowing economic activity.
  • Boston, Cleveland, Richmond, Chicago, St. Louis, and Kansas City reported flat activity.
  • San Francisco, Dallas, and Minneapolis reported slight growth.

The bottom line is that inflation seems to be rising at a slower pace and that the US economy is slowing, as eight of eleven Fed districts reported slowing or flat economic activity. The three that reported growth described it as slight to moderate.

Bond Yields Test Resistance. Mortgages Follow. Homebuilders Perk Up.

The most predictable relationship in the stock market currently is the one that connects bond yields, mortgage rates, and homebuilder stocks. When bond yields fall, mortgage rates follow. Increases in home sales register and homebuilder stocks rally.

The crucial point on the 10-Year US Treasury Yield ($TNX) is 3.85%. If yields remain below this level, the environment should remain stable.

Moreover, if I’m right and the economy continues to slow, bond yields will roll over, and mortgage rates will drop as demand for new homes again picks up.

As things stood last week, the S&P 500 Homebuilding Subindustry Index ($SPHB) seems to have made a short-term bottom as traders begin to factor in the scenario above. 

If $TNX remains below 3.7%, it’s a sign that bond traders are less worried about inflation. This should be bullish for homebuilder stocks.

For an in-depth comprehensive outlook on the homebuilder sector, click here.

NYAD Rallies; SPX Joins NDX’s Breakout; Liquidity is Stable; VIX Hits New Low.

It was quite the week for the market’s technical picture.

The New York Stock Exchange Advance Decline line ($NYAD) rallied back above its 50-day moving average, signaling stocks are back in an uptrend.

The Nasdaq 100 Index ($NDX) extended its recent breakout, closing the week well above 14,500. The current move is unsustainable, so some pullback and consolidation are likely over the next few days to weeks. On the other hand, it could take some time for a consolidation or pullback to develop, as both accumulation distribution line and On Balance Volume (OBV) are in solid uptrends, signaling lots of upward momentum.

The S&P 500 index ($SPX) finally broke out above the 4100–4200 trading range, decisively confirming the trend in $NDX. OBV continues to improve, while the Accumulation Distribution line remained in an upward trend.

VIX Breaks to New Lows

The Cboe Volatility Index ($VIX) broke to a new low as call option buyers overwhelmed the market. This is probably a little too much bullishness all at once, so we’ll see how long it lasts.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity is Still Limited

The market’s liquidity may have bottomed out, but it’s not particularly bullish. The Eurodollar Index ($XED) failed to rally above 94.50, a bearish development. For now, it’s good enough to keep the rally from imploding. A move below 94 would be very bearish.

A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte

About the author:
Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20’s & 30’s, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website.
Learn More

Subscribe to Top Advisors Corner to be notified whenever a new post is added to this blog!

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#Momentum #Breadth #Rallies #Truth #Time #OPEC #Crude #Oil

Trade What You See; Profits are Waiting Beyond the Daily Grind

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As the mainstream focuses on negative developments, such as the Fed’s latest utterings and the implosion of subsets of the commercial real estate (CRE) sector, there seems to be a stealthy migration of money into other select areas of the market. This is a great example of why focusing on the markets instead of the external noise is the best way to trade.

Trade What You See

There’s an old saying among wise veteran traders: “trade what you see.” And the current market is a perfect place in which this adage holds up.

As investors await the Fed’s nearly certain rate increase on May 3rd, the daily options market-related gyrations in stocks continue to develop. Meanwhile, the four-prong post-COVID pandemic megatrend continues to evolve, as I discuss in detail in my latest Your Daily Five video. Said megatrend is composed of:

  • The Great Migration – population shifts to suburbs, rural areas, and the sunbelt; 
  • The CRE Implosion from an oversupply of office space;
  • Bullish Supply Dynamics for Homebuilders; and
  • The Evolving End of Globalization.

As a result, the only solution is to be contrarian, to trade what you see, and to focus on investments from a longer-term viewpoint. Stated plainly, if a stock is not crashing and the underlying business is performing reasonably well, then it’s a keeper until proven otherwise.

Even better, as I detail below, detecting trend changes early is very helpful.

The Evolution of the Commercial Real Estate Crash

There is more nuance than what meets the mainstream eye going on in the beleaguered CRE market. 

For example, the big news of the week was Vornado’s (NYSE: VNO) dividend cut, which sent the shares lower as investors braced for worse news, such as the possibility of loan defaults. If that happens, few would be surprised.

The price chart’s Accumulation Distribution (ADI) shows that short sellers have had a field day with the shares over the past twelve months, especially during the last quarter. On Balance Volume (OBV) also indicates more sellers than buyers have been the norm of late.

But things may be changing in other areas of the real estate business. And a closer look at VNO’s shares shows that the one day mini-crash in the stock on 4/27/23 was followed by a bounce which, of course, was short-covering.

As I described in my recent Your Daily Five video, the evolution of the post-pandemic megatrend is evolving into a new and quite investable phase. That’s because the market is slowly adapting to its circumstances as businesses adjust to the changing landscape. And as one section of the real estate investment trust (REIT) world is suffering, other areas are starting to show signs of life.

To be specific, REITs, which are heavily laden with office building properties that are having trouble paying their bills. Loan defaults are becoming quite common; foreclosures and bankruptcies are likely to rise. On the other hand, those REITs who derive their income from residential properties are faring better. The result is an unexpected improvement in the price chart for the iShares U.S. Real Estate ETF (IYR).

The price chart for IYR shows that the entire sector still has plenty of work to do. But amazingly, REITs may have bottomed out. All of which suggests that the stock market may be starting to quietly price in a pause in the Fed’s interest-raising cycle after the almost-certain rate increase, which is expected on May 3.

IYR’s Accumulation/Distribution indicator (ADI) suggests that short sellers may have lost their enthusiasm for the sector. On the other hand, On Balance Volume (OBV) is still bottoming out, which suggests that buyers have not overwhelmed sellers altogether.

Still, the ETF is trading tightly near the $84 area, where there is a large Volume by Price bar (VBP). If the price can move above this key price point, we are likely to see a challenge of the 200-day moving average. 

A move above that would be bullish. I have just added two long REIT plays to my portfolio. Get the details with a free trial to my service here.

Bond Yields Turn Lower at 3.5%. Home Buyers Play Cat and Mouse with Mortgage Rates.

The bond market continues to price in a slowing of the economy, while homebuyers continue to play a nifty game of cat and mouse as they try to time the mortgage market. Homebuilder stocks continue to move higher.

Over the last few weeks, the Fed hinted that another rate increase was coming at its May 2-3 FOMC meeting. Initially, this bearish talk pushed the U.S. Ten Year Note (TNX) despite above the 3.5% yield area. This resulted in a rise of the 30-year mortgage to 6.4%, where it has remained for the last couple of weeks.

This upside reversal delivered a slowing in existing home sales. But the reversal in bond yields on the week ended on 4/28 is likely to lead to yet another reversal in mortgage rates. Moreover, savvy potential homebuyers are likely calling their bankers as I write in order to lock in rates before the official numbers are released next week.

Note the close relationship between TNX, mortgage rates, and the steady uptrend in the homebuilder sector (SPHB). Specifically, take a look at the rally in SPHB, which was spawned when the average mortgage rate topped out in late 2022 above 7%. The subsequent decline in mortgages has been a boon for homebuilders.

For an in-depth comprehensive outlook on the homebuilder sector, click here.

NYAD Seems to Have Nine-Lives. NDX Breaks Out.

The New York Stock Exchange Advance Decline line (NYAD) once again survived a potential breakdown as it continues to hug its 50-day moving average, while remaining well above its long-term dividing line between bull and bear trends, the 200-day moving average. It would be nice to see breadth improve, but the fact that it has not broken down altogether is very encouraging.

The S&P 500 (SPX) continues to hold between 4100 – 4200, but is getting closer to what could be a major breakout if it can get above the 4200 area. On Balance Volume (OBV) and Accumulation Distribution (ADI) remain very constructive for SPX.

For its part, the Nasdaq 100 Index (NDX) closed above 13,200 on 4/29/23, scoring a nifty breakout with OBV starting to turn up a bit more decisively. If NDX can stay above 13,200, the odds of a significant move higher are well above-average.

These are bullish developments, which suggests money is moving into technology stocks. When tech stocks rally, they often give the whole market a boost.

VIX Makes New Lows

The CBOE Volatility Index (VIX) again broke to a new low and is now well below 20, a sign that the bears are throwing in the towel. This remains bullish despite the intraday volatility in the options market.

When VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures in order to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity is Stable. Upcoming Rate Hike Could Crimp.

The market’s liquidity retreated as the Eurodollar Index (XED) remains a question mark, even though, for now, it remains stable, yet below 94.75 on Fed hike expectations. A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks. On the other hand, in the current environment, it’s more of a sign that fear is rising and investors are raising cash.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte

About the author:
Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20’s & 30’s, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website.
Learn More

Subscribe to Top Advisors Corner to be notified whenever a new post is added to this blog!

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#Trade #Profits #Waiting #Daily #Grind