Pulte Homes – A Massive Recovery

Feb 3, 2008: 10:26 AM CST

Pulte Homes (PHM) was one of the major homebuilder stocks to suffer major losses during 2007, but 2008 has shown a dramatically different picture for this homebuilder stock.

On the shorter daily time frame, notice the discreet momentum divergence that proceeded the major rally.

Recall that at the birth of a new trend after a long trend has been established, the first momentum impulse is often caused by traders who are massively short, as they buy back large quantities of stock to cover their short positions. This increased momentum (and price) move also attracts “bottom fishers” who believe they are buying the stock as close to the absolute bottom as possible.

Pulte Homes above shows a classic technical set-up that describes this pattern very well.

Let’s view the weekly picture now:

Notice that there are clear signs of capitulation on the side of the sellers as we moved into 2008. Notice the massive volume numbers as the stock made newer and newer price lows.

Also, notice the massive momentum divergence with price that began occurring in September 2007 and has now been resolved with a new momentum high on the weekly chart as price has risen above the falling 20 period moving average to make new highs not seen since September.

Again, a certain percentage of the recent move is likely due to short-covering, and this could be described accurately as part of a “short-squeeze,” but I see something else going on.

According to the Sector Rotation model, Financials and Consumer Discretion (including homebuilders) have seen the most significant increase in funds over all other sectors recently, which occurs at or near potential market bottoms.

With all the bad news out in the market, it’s reassuring to see that sectors once thought destroyed are making a potential bullish recovery, which is absolutely due to the environment of lower interest rates.

How long this recovery in these sectors will last is anyone’s guess, but for now, this is a welcome bit of bullishness in a sea of overwhelming bearishness.

6 Comments

6 Responses to “Pulte Homes – A Massive Recovery”

  1. gary Says:

    I’ll point out that the HGX had a powerful counter trend rally in 06 of roughly 35%. That was hardly the end of the bear market in housing though as we’ve seen this year. The financials are now experiencing that same counter tend rally. The troubles in the financial sector is hardly over yet. It usually takes at least a couple of years to clean out all the excesses. I seriously doubt the financials are out of the woods yet just because the Fed has lowered rates. All the Fed has really accomplished is to make the situation much worse in the long run by now piling on the fuel for spiking inflation.

  2. Trader Says:

    At this rate of recovery, it is not surprising to see another round of pull back in near future.

    We have to be prepared….. it is now a Trader’s game rather than an Investor’s game.

  3. Corey Rosenbloom Says:

    Gary,

    True, and I’m a major bear in the market, but I try to stay open to the signals the market is providing. I’ve discussed this with a couple of other traders and they feel the same way you do, as do I, but I did want to point out this rotation is a signal against the overwhelming bearishness that is awash in the market.

    Inflation is on the rise, and we have seen gold futures make new highs along with other commodity based futures, and the US Dollar Index is on a course to make more new lows.

    We’re not out of the woods yet, not by any means, but for the moment (however long that last), the sector rotation model as I interpret it is sending a bullish signal.

    Thank you for your comment.

  4. Corey Rosenbloom Says:

    Trader,

    I’m with you 100%. This is currently a counter-trend move, and investors are being slaughtered. Many have already sold out of their positions, and are agonizing at the recent upwards swing in the overall market.

    As a trader, volatility is what we crave. Unfortunately, this same volatility makes investors sick. Some traders are even getting sick.

    All the best!

  5. Ben Bittrolff Says:

    I’ve updated my post and charts: Fed CHANGES Really Scary Fed Charts

    Removing TAF makes a significant difference.

    $50 billion to be exact.

    TAF operations are ongoing. So this discrepancy would just continue to grow.

    LIBOR is also starting to misbehave, again. Nothing too serious yet (not like before Christmas) but you get my drift. Stress is creepying back into the system.

    The (counter trend) rally in risky assets should just about be over, if I’ve interpreted this correctly.

    TheFinancialNinja

  6. Corey Rosenbloom Says:

    Gary,

    True, and I'm a major bear in the market, but I try to stay open to the signals the market is providing. I've discussed this with a couple of other traders and they feel the same way you do, as do I, but I did want to point out this rotation is a signal against the overwhelming bearishness that is awash in the market.

    Inflation is on the rise, and we have seen gold futures make new highs along with other commodity based futures, and the US Dollar Index is on a course to make more new lows.

    We're not out of the woods yet, not by any means, but for the moment (however long that last), the sector rotation model as I interpret it is sending a bullish signal.

    Thank you for your comment.