Friday, July 14, 2006

Housing Death Throes

After our last foray into Housing options we decided to leave the sector alone as the action we had been seeking had not materialized. Namely, the sector imploded on high volume after a prolonged downtrend. The implosion came on June 6th punctuated by almost double the normal trading volume. Technically (and accordng to our model) it was a perfect buying opportunity. We got long a substantial number of calls (we chose RYL as the main vehicle) and even though we did see some upside, marginally profitable action, the real move we had envisioned never came. Those calls are paper now.

Today the sector is blowing up again. And we are doing the same thing.

Hadn't we learned our lesson? Yes, as far as risk management is concerned (or rather, our risk management approach was yet again validated). No, otherwise. This is precisely why we're buying calls again. Today the sector is not just oversold, it is utterly obliterated by the sellers throwing up their hands and screaming

Some technical/sentiment facts:
  • The sector is through or at its weekly support levels.
  • It is blowing off on super-high volume after a non-stop downtrend.
  • This morning it reversed at a critial level (LEN) and stopped falling in face of overall market weakness.
  • It's got so much bad news that any more isn't going to make this swampy outlook any worse. (What, declining orders? Falling prices? Excess inventory? Higher rates? Too many ARMs? Wait, we know all of this already.)
  • The overall market is nearing an intermediate bottom and even if it decides to implode much further, the oversold stocks won't get that much more oversold. When markets collapse for the second time, it's the high-flyers that get thrown out for sale.
So, if the above sounds like I am trying to convice myself why the sector should be bought, then I just did.

Like it or not, that's what the price charts tell me.



At 2:06 AM, Anonymous marcum said...

You haven't posted much in a while. Are you doing okay?

At 12:16 PM, Blogger Dmitry said...

Marcum, thanks for the concern :)

We're doing well. My focus has been taken away from posting as we've initiated a new leg of research that has been both exciting and quite consuming. I'll be posting about that in the future.

I have to also say that talking about sectors overall doesn't add much controbution to all the rhetoric out there. So my future posts will likely focus more on trading ideas and approaches, rather than market view.

Thanks again,


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