... and calamity begets (portfolio) crisis

My earlier post in this lengthy series re the homebuilder shares, Carnage begets calamity, promised this post. (Follow the links back to the original posts on 1 July and 5 August.) Whereas I initially had warned of a "pullback from the highs of 30-50%, and then we'll see", that pullback has occurred and this group's stock action remains ugly, ugly, ugly.

And so at last we enter the land of portfolio blowout. "Get me out!" the institutional portfolio managers scream. "Sell at any price, just lose the position!" You can see this transpire in the daily action of the stocks themselves -- if you're watching each tick; if not, it also is apparent in the daily bars on the stock charts. At this moment, I see no respite to continued selling and lower prices. I suppose a Fibonacci retracement of 61.8% is in order, but recall that number is a retracement of a primary move, not a 'haircut' from an arbitrary high (as most technical 'analysts' believe) -- even if that high trade is the all time high.

I created the following list of homebuilder shares during the Spring, as a means to monitor the group and forecast future price action. They are ranked from strongest to weakest performers, especially based on recent performance. (Many others are excluded due to comparative illiquidity, etc.)

Strongest:
Brookfield Homes/BHS, William Lyon/WLS
Strong:
Beazer Homes/BZH, Centex/CTX, KB Home/KBH, Lennar/LEN, MDC/MDC, DMI Homes/MHO, Meritage/MTH, NVR/NVR, Orleans/OHB, Pulte/PHM, Ryland/RYL, Standard Pacific/SPF
Weak:
Comstock/CHCI, DR Horton/DHI, Dominion/DHOM, Hovnanian/HOV, Toll Brothers/TOL

These portfolio blowouts (of a specific group or sector) tend to occur regularly; typically, because a group or sector has become over-owned and over-valued. The rationale for holding -- and continuing to buy anew during June, July, August, and September 2005 -- defaults to the same old thing: "It's different this time." Of course, the purveyors of this 'logic' do not state it exactly that way, but the result is the same. They have become embroiled in attempting to convince themselves, as much as convincing you. They too will sell sooner or later; convinced as they are of the supremacy of their rationale and the higher prices yet to come, their sell orders will occur later rather than sooner.

So watch for a capitulative low that marks the end of this profound down trend; the shares will gap down big (5% or more) on the opening on "bad news", and then reverse intra-day (in fact, very early) and head higher. That early morning low should represent a tradable low for the intermediate term, and possibly the low. It does not mean, however, this group will resume its status as bull market leader any time soon; individual opportunities might shine but the rest of the group will be a market performer, at best. If you, like me, prefer to invest among the leaders, then you will hunt in different savannahs for the big 'game'.

This post likely represents my final entry re this group (homebuilders); little remains to be said. I have only continued this thread for as long as I have (four months!) to illustrate how to discern a final high, sell into it, and then stay away from the group (or short it). Most investors, unable to discern a critical reversal and change in trend (direction), continue to buy the dips, believing higher prices lurk around the bend. I could, of course, write a post during that critical reversal day, if you prefer, when you can buy as all others have finally given up (hope) -- and sell.

This link will take you to an interesting article re this group.