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Welcome to the Equities Section of Options Realm |
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Today (2/25/2007) I am posting an article that was submitted to my by Grimreaper a member on www.einvesting.com. Here is the article that I found very informative. The stock market truly is a forward looking mechanism. Let's look at the case with real estate using TOL as an indicator of what was going to happen in the housing market, without getting into the reasons why homes doubled in value in many areas of the U.S. from 2002-2006. If you look at the 3 year chart of TOL you can see that price held steady through most of 2004, actually forming a nice base from which TOL made its unsustainable run in 2005. In April 2005 TOL signaled sell according to the DMI technical indicator and that's where the mistake was made as human emotion took over and traders could not ignore the good news coming out of TOL. Instead of letting a healthy retracement run its course investors looked at the pullback from the $45 area to the $35 area as a buying opportunity. Investment gurus like Jim Cramer were making the homebuilders focus plays and the buying public went all in driving TOL to the multi-year high above $55 in the summer of 2005. We see what happened next. On the other hand, home prices continued to rally well into the 4th quarter of 2006! We are only beginning to see weakness in the housing market and truly bad news started materializing the past few weeks as many of the subprime lenders were taken out to the woodshed. Many market analysts are now saying the worst is over for housing and have begun to try and time the bottom of this sector yet TOL is telling us a different story in recent news releases as well as in the charts. It recently traded to $35 (the same area where the Apr-May 2005 mistake was made interestingly enough) but has begun to pullback after bad guidance on future sales and earnings. Keep your eye on TOL (as well as other homebuilding stocks) which was once the leader of the pack for a clue on the future direction of home prices. Many believe the housing market will dictate what happens in the U.S. economy. The chart is dictating a move back down to retest the 52 week low as I see it. |
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