We all know the consensus fundamentals. Today's business section says: " 'Home-price decline expected to worsen' prices may decline as much as 20 percent by the end of 2008 ... Standard and Poor's said." Moreover, jobless claims are up, and the index of leading economic indicators is down. All this can be expressed quantitatively in market action. Here's five years of S&P: http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=spy&time=10&freq=2
Over on the left of that screen is the 'upper indicator.' Enter 34 SMA. Clearly the five-year long-term trend turned bearish (negative slope on the 34 week MA) at the end of 2007. Also on the left is the 'compare to' feature. Enter symbol NVR. It is interesting that NVR discounted the coming bear market, behaving as a leading indicator. This is not surprising, since housing is a leading economic indicator.
In any event, markets are supposed to discount the future, and all the news is out there, it's weak, and the markets are weak.
NVR is currently in a long-term descending wedge pattern with $400 acting as support and an upper down-trend line pointing to around $800. For definitions, I'm calling the 233 gay MA long-term, the 89 day MA intermediate-term, and the 34 day MA-short term (Fibonacci numbers). The long-term trend has been down since around July of 2007, but is now flattening. The short-term trend turned up around December of 2007, with the intermediate term trend turning up about the middle of January of this year. There exists a pattern of higher highs and higher lows going back to October of 2007. Over the short-term, NVR has broken out above the 233 day MA three times in the past few months, the first time on volume, the second time on none, and over the past few days on credible volume again. Hindsight shows the first two breakouts to have been false; is the current one the real deal? Only confirmation can answer that question. As usual, pps could pull back, resulting in another false break-out, or it could linger at the 233 day MA, reflecting indecision, or continue up with volume indicating a bonified break-out.
I have opened up a small long with a stop-loss just below the 233 day MA. I didn't excactly like the doji action of yesterday (Thursday) but the volume was encouraging.
That's really all you can do on a set up for a position trade. You place your stop-loss, which protects you, and let it run if it will. Whether the brunt of bad news is sufficiently discounted, and the brief turn around in commodities, the dollar, and US equities can gain some traction is anybody's guess.
I had my stop just below the 233 day MA, so I didn't get stopped out this week; close but not quite. It's been dicey, but today's close was amazing. Market was tanking as usual and NVR just keeps on climbing. Not sure what to expect in the upcoming weeks, but at least I'm back above my basis. I've got the top of the up-trend channel at about $640 and will look to close out somewhere between there and $650, if we make it that is. As the general market trend is down, I'll be running a close stop-loss going forward. Like you I'll be looking to short at $660 if conditions look ok at that time.
I call your short with a 1/6th additional long position added today @ $616. My exit strategy generally focuses around support-resistance. I've got $650 as the top of the up-trend channel in the intermediate-term trend. Exit points are points of attention only, as I actually use trailing stops to let the market make those decisions.
Gotta admit the existing home sales numbers were a kick in the pants. The first sign in a long time of some stability. The median price decline shouldn't hit NVR as hard due to their demographics of their customer base.
In terms of fundamentals it's a mixed risk picture. As I've mentioned before regarding the three-L's of real estate, NVR is involved in high-end residences which are less vulnerable to forclosures, they also didn't leverage land, etc., so they are better positioned than other HBs. However, the housing market is presently weak, and could continue that trend. Usually you want a breakout from a strong component of a strong group. For example, ITB: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=itb&sid=0&o_symb=itb&freq=1&time=8
Is breaking-out above its intermediate-term 89-day MA with volume, and that MA is flattening, but the long-term 233-day MA is still down, so it's premature to call that a strong group, as they're just now stabilizing. So in terms of opportunity cost, NVR has some good things going for it, while the group itself is questionable.
Technically NVR is breaking out for the third time on ok volume, so it's worth a shot to me, because a big component of my trading model is trying to land position trades on break-outs from the 34 week MA on volume from a basing pattern. NVR fulfills these criteria itself, but the group picture is a drag on it, and I will likely treat the trade as a trend rather than a position trade if things go my way, because of the murky risk picture. I'm staying with a conservative 1/3 position size also. If it fails I will convert my stop-loss to a short. In the case of failed break-outs, three times isn't a charm.