August 26, 2003

Housing Stocks Topped Out Too?

The macro evidence of a housing top is below. But what is the market telling us? Well, it hasn't opened yet as I write this. But let's look at a micro example. This from Dow Jones Business Wires: "Toll Brothers Inc.'s fiscal third-quarter net income jumped 27% amid a surge in housing sales and record-level contracts. The luxury-home builder Tuesday reported net income of $68.2 million, or 90 cents a share, for the period ended July 31, compared with $53.5 million, or 70 cents a share, in the year-earlier period." That's good new for TOL. It managed to make money during the huge, blow-out rally in homebuilding and housing sales. Bravo! But with rising rates and a peak in home sales, where will the earnings come from? You don't have to be a chartist to see look at this and see a massive long-term top in home-building stocks. And if you don't want to go visit the chart, don't worry. It shows four top home-building stocks, Centex (CTX), Lennar (LEN), Ryland (RYL), and Toll Brothers (TOL), enjoying a huge run up in mid 2002 before the summer crash...and then another huge run up beginning with the end of major combat operations in Iraq. Looks like another peak to me...and a good time to be "short" homebuilders through puts on the Philadelphia Home Building Index (HGX). That's exactly what I'm doing at Strategic Options Alert. I'll keep you posted on how we do.


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