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Homebuilders weak ahead of Pulte warning

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The Dow Jones Home Construction Index (DJUSHB) 631.51 -5.31% moved opposite of broader market gains, and traders may have smelled out this evening's earnings warning from index component Pulte Homes (NYSE:PHM) $56.33 -8.59%, which accounted for the bulk of the DJUSHB's intra-day declines.

In Monday's extended session, shares of Pulte Homes (PHM) fell an additional 6.7% from Monday's close, to $52.55, after the company cited weaker sales and unit volume in its Las Vegas markets for lowering of quarterly and full-year earnings guidance.

Pulte said it now expects third quarter earnings from continuing operations to be in the range of $1.95 to $2.05 per share compared to previously issued guidance of $2.00 to $2.10 per share. For the full year, the company expects earnings from continuing operations to be in the range of $7.40 to $7.70 per fully-diluted share versus prior guidance of $7.80 to $8.00 per share.

While Las Vegas' market, which Pulte had raised prices by as much as 50% in some communities did slow sales volumes for the company in that region, Pulte said preliminary signups for its third- quarter ended September 30 had increased 11% over the same period last year.

Pulte's President and CEO Richard J. Dugas Jr. addressed the Las Vegas market by saying, "Consumer acceptance of these increases at certain price levels has apparently reached a ceiling, suggesting that prices have become higher than what the market will support. Pulte has already implemented actions to lower local market pricing to better align the Company's operations with current market conditions."

Dow Jones Home Construction Index (DJUSHB) - Daily Intervals

Pulte may have found a price sensitivity level in Las Vegas after raising prices nearly 50% in some developments in and around Las Vegas. I was floored that demand for housing was so strong to even think such an increase possible. As they say, "What goes on in Vegas, stays in Vegas."

Las Vegas' housing market is obviously hot, and price increases found in that region are an exception to the national average. Look for new entry points in the homebuilders back near the lower end of upward regression. If still holding some longs in the group, write some near-term covered calls.

Market Snapshot / Internals - 10/04/04 Close

New highs expanded on the NYSE and we haven't seen new highs breach the 400 number on the big board since early March. The NYSE Composite ($NYA.X) 6,677.75 +0.21% did trade into the 6,686- 6,735 "zone of resistance" today after its bullish breakout on from September 21 at 6,611. NASDAQ's NH/NL ratios show some resumption of bullish leadership as NASDAQ Composite (COMPX) 1,952.40 +0.52% tested its 200-day SMA (1,964.50) today.

NYSE Composite ($NYA.X) - Daily Intervals

After the NYSE Comp. closed above the 6,611 level on September 21, the NYSE quickly reversed to re-test its rising 200-day SMA (6,511) and conventional 50% retracement. End of quarter window dressing as well as strength from retailers, transports, cyclicals and energy sectors have the NYSE trading what I feel is going to be a formidable area of resistance.

In this weekend's Index Trader Wrap, fellow analyst Leigh Stevens looked at NASDAQ Composite resistance to be present at 1,985, and with the NYSE Composite being stronger, on internals and PRICE measures, I'd tied NYA.X 6,735 and COMPX 1,985 as rather correlative levels of resistance.

Pivot Analysis Matrix -

I removed the TRIN from the WEEKLY Pivot and placed the VIX.X in its place per trader/investor request. Since TRIN "resets" itself each day, I can't argue that it would be of greater help to traders to have a VIX.X observation in the WEEKLY Pivot.

The S&P 500 Index (SPX.X) 1,135.17 +0.32% didn't quite get a trade at WEEKLY R1 as I thought it might today or tomorrow, where after an impressive end of quarter rally, I was looking for institutional bulls to perhaps limit their buying at WEEKLY R1 early this week, with the SPX easing back toward MONTHLY Pivot of 1,115 and October's "Max Pain" (1,115) by October expiration.

Additional October "Max Pain" levels are DIA $101 ($1 increments), OEX 540 (5-point increments), QQQ $35 ($1 increments) and SOX.X 380 (5-point increments).

S&P 500 Index (SPX.X) - Daily Intervals

Not unlike the rebound in the NSYE Composite ($NYA.X) from its 200-day SMA, the SPX.X has rebounded from its 50-day SMA, where today's trade brings a break ABOVE MONTHLY R1 (1,131) and our "cheater's" downward trend. This week's WEEKLY R1 is close to conventional 80.9% retracement, where I would look for further gains above the WEEKLY R1 to find sellers firm at MONTHLY R2 (MONTHLY levels marked on above chart), where first sign of weakness, or abatement of recent gains to come with the SPX slipping back below the WEEKLY R1 (1,141.66), but more importantly 1,140 and today's high.

In Monday's Market Monitor, I posted an SPX.X chart at 02:51:05 with WEEKLY and MONTHLY Pivot levels, which I feel gives traders a better view of the "strength above WEEKLY R1" with resistance firm at MONTHLY R2, where we would then look for some October expiration weakness back below 1,140.

Jeff Bailey

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