Here are a few observations on a homebuilding stock. In particular I am talking about Ryland Group, a home builder. Even if you have only followed finance or the stock market occasionally over the last few years, you probably have heard about how great the real estate boom is. And yes, there were also plenty of predictions out there about a real estate top among other things..
Well, tops are certainly difficult things to predict with any sort of precision…
But if you can build up enough evidence to support your case, one that is based on either technical analysis or fundamental analysis then you might have a fighting chance. This analysis is going to be quite brief. And maybe I cannot even call it a real analysis per say, but rather a few observations I wanted to make after gathing up some data in recent weeks.
Here is a question for you.. “What do Yahoo and Ryland, the homebuilder have in common?” Probably not too much in a business sense. One builds homes, the other is online and in the advertising biz. Well perhaps they have nothing, or almost nothing in common now, but I do believe they may have something common in a few years time…
What am I talking about?
I will tell you in a minute.
First, take a look at this image below. Do you use yahoo email? Or maybe you browse the yahoo online network a lot.. well then chances are you have seen the image below. Actually it is an ad run by “Lower My Bills dot com”, the online mortgage finance company… These ads have been relentless in my yahoo email account and quite distracting I might add. It is part of the reason why I switched to the google email address you see at the bottom of this web page (Yah!). I was swamped with LOADS of junk mail anyway. And this is also the reason why the best way to get updates to the Online Trading Forum are through KLIPFOLIO
That pig you see above this text is huge. Period. Indeed, it is the longest, fatest pig I think I have ever seen! And it is to be seen all over the internet. So what is my point..? Well, a long fat pig may be a fairly good psychological indication of excess greed. And as we know the stock market, while a great place to speculate in, does not deliver un-ending riches to anyone forever. It has a nasty habit of reverting back to the mean. It also has a nasty habit of cycling just like the planets do all year round.
The chart you see to the left of this text is the long bond. The esteemed Steven J. Williams posted an extraordinary editorial on a possible long bond crash here. The KEY that the long bond is faced with is that down slanting blue trend line or resistance. This large formation is an infamous symmetrical triangle that is winding up for a big move. It is likely that it will be a big move but that it will be a slow motion big move culminating in a selling climax. Keep in mind that the chart is a quarterly price bar chart, so clearly, it takes TIME for things to change with that chart.
It is looking like the most current quarterly price bar may indeed turn out to be a bearish shooting star that failed right at the upper blue down trend line resistance. Could it be that the long bond is now ready to go into a death spiral downwards spiking rates higher and forcing the Fed to be much more aggressive with rate increases? Its possible. It is definitely possible in my opinion. Credit for this bond crash scenario goes to Steven J. Williams. He was the one who identified this possibility. The next year certainly is going to be interesting.
This next chart is a side by side comparison of the home building stock chart RYL or Ryland Group, and on the right is Yahoo. I am sure you remember the 2000 peak in many of the dot coms. A lot of them were faced with a situation of expanding and hiring too aggressively combined with a downturn in economic demand for their products and services… Might such a repeat situation now start with Ryland Group and other home builders? Well again, it certainily is a definite possibility. Home building companies that are expanding too rapidly, creating too much inventory of new homes, and leveraging themselves too much are at high risk. The Ryland chart on the left is a yearly price bar chart, note that if Ryland closes the year 2005 right about where it is now, it would in my opinion be a very bearish indication for 2006 for this stock. It would create a yearly shooting star and set Ryland up for a plunge into 2006. The other thing that is worth noting about the Ryland chart is that it seems to me at least it has used up most of its cause. This kind of move is unsustainable without some kind of consolidation.
Indeed, if the Fed were to start an aggressive campaign of raising rates to try to defend the dollar what is going to happen to the homebuilders?? I think you know the answer already. It will be interesting to see how this all shakes out.. But I believe the writing is on the wall.. I am going to step up to the plate and make the fearless forecast that we have seen the peak in Real Estate as of the date of this post. 😛 So there!
TC
P.S. Ooops, I almost forgot. One last image I forgot to put up that sort of puts the icing on the cake for this articles scenario.. I will let you read into it..
