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It's crazy man! Just crazy!

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Subscribers are getting hopeful that a boom is currently underway in the homebuilders as today's sector leader now has the DJ US Home Construction Index (DJUSHB) pushing gains at +4% and this index breaks to a new 52-week high and edged above its mid-point of regression. Subscriber's that traded some of the HMO stocks in the HMO Index (HMO.X) get the feeling that anything is possible when a group comes into favor and earnings from sector components come in above expectations. It's enough to make a technology bull pull his or her hair out and can often times have institutional fund managers doing the same thing.

For the fund manager, the problem becomes twofold. Do I sit with technology stocks where visibility remains unclear and risk redemptions if the market leaves me behind? Or do I roll out of some under performing holdings and roll to the groups where my peers and competition are finding success?

Even subscribers are wondering what to do? One recent e-mail has the subscriber saying, "Jeff: Thanks for the heads up yesterday about this lagging home stock (Toll Brothers (TOL)). Bought in yesterday, as well as with RYL, added CTX this AM as well. I missed the run in the HMOs due to procrastination, but decided to pull the trigger on these. With the DJUSHB rocking, how long would you hold these? RYL reports tomorrow, and while I usually wouldn't hold through earnings, CTX has moved well to the upside after their report."

Well, those are some good observations. Yes, the homebuilders are "rocking" today and now the market is quickly "factoring in" the good numbers and making some scenario adjustments. So are some bear for that matter. What's important for the trader is to stick with your plan you outlined when the trades were initiated.

You did set a target didn't you? As identified in this morning's 11:00 Update on OptionInvestor.com, the upper end of regression is at/near the $415 level.

For Toll Brothers (NYSE:TOL) $29.50 +5.73%, the upper end of the regression channel is at/near $30.

Lets take a look at Ryland (NYSE:RYL) $107.93 +4.2% and see if there isn't a pattern taking place with regression.

Ryland Homes Chart - Daily Interval

A trader that finds himself "overweight" in the homebuilders is most likely instigating some account management and looking to either sell some targets or at least snug up stops. I wouldn't consider an account "full" of homebuilders without some type of profit booked, very good account management ahead of tomorrow's economic data for New Home Sales. Let's face it. The number is probably going to be strong as earnings numbers have also been strong in recent sessions. But the MARKET is very quick to factor in this "good news" and now subscribers are seeing it factored in further today.

Centex Corporation Chart - Daily Interval

Share of Centex (CTX) look to be lagging that of Ryland (RYL) and a trader can make some important observations going forward from this. If the group is going to lead, then perhaps sector bulls should expect RYL to lead the charge.

Unfortunately, a trader knows that the only time "profits are for certain" is when a trade is actually closed and profits booked. A trader with multiple positions in a sector will sell some positions at bullish targets, but hold others where there is still some upside to bullish trading targets. Then, should an economic number come in weaker than expected or the "good news" already be factored into things, some gains have been booked and profits can still be salvaged or small losses realized in other positions still held in the account.

If "good news" in the homebuilders is just starting to be factored into things and more upside is still to be had from tomorrows New Home Sales for March, the Centex (CTX) should have further upside.

Remember the crazy things the HMO Index (HMO.X) did last week when it blew out the upside of our upward trending regression. It's what some traders say happens when "demand exceeds supply!"

Here's a trader's trick! I call it "stacked regression."

HMO Index Chart - Daily Interval

A "stacked" regression technique hints that the HMO's may have reached a near-term top (once again) and may be subject to some profit taking. Look for support near the $550 level, which would be the "old" upper end of regression used in the past, and the lower end of "stacked" regression. Can the homebuilders duplicated the technicals of the HMO's? Hard to tell but the fundamentals have been strong for both groups and fund managers that have been buying the HMO's have done well and look to be accumulating the shares.

A trader than monitored and now understands how things unfolded "technically" in the HMO's, knows what to be looking for in the homebuilders. Good trading ahead of we learn from the past.

Jeff Bailey
Senior Market Technician
Option Investor

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