Tuesday, December 18, 2012

DHI: Congestion worthy of the flu

The Fort Worth, Texas homebuilder D.R. Horton Inc. (DHI) broke above its 20-day high of, coincidentally, $20 today, swinging into bull phase under my trading rules for the first time since early September.

Horton operates in 25 states and 73 metro markets, so its fortunes rise and fall with the national housing market. No coincidence, the real-estate exchange-traded fund XRT also entered bull phase today.

Of the 10 stocks and ETFs that I analyzed today, only DHI had an acceptably strong trend, scoring 132% of its average daily trading range.

The stock has been in a sideways trend since mid-November, with a floor of about $18.27 and a ceiling of $20. This level marked a decline from a prior sideways trend running from mid-September, with a floor of $19.73 and a ceiling of $22.79.

This means congestion worthy of the flu season, as DHI tries to push higher.

All of the autumnal Sturm und Drang comes as a correction to a stunning run up from $8.03 in October 2011 to $22.79 last September. I say stunning because, remember the recession? Remember all of the angst about the housing market not leading the recovery as it has in the past? Somehow, DHI didn't get the memo.

And if DHI didn't get the memo, analysts haven't read the chart. Their aggregate enthusiasm index stands at a negtative 33%, a level that is known in the business by the technical term "Ew! That sinks!"

Admittedly, Horton's return on equity isn't a real standout. It stands at 8%, not awful but not often the mark of a company that is going places. On the plus side, debt is quite low, amounting to only 5% of equity.

Quarterly earnings have been meandering and small, with two losing quarters out of the last 12. The 3rd quarter of 2012 had a huge one-time "non-cash benefit" that bumped earnings up to the stratosphere, but that's not significant in judging the business for my purposes.

Nine of the quarters surprised to the upside, and three to the downside.

Institutions own 88% of shares and have bid up the price a bit. It takes $1.48 in shares to control a dollar in sales.

DHI on average trades 5.7 million shares a day, sufficient to support an excellent selection of stock option prices with open interest near the money in the four figures. The front-month at-the-money bid/ask spread for calls stands at 2.4%.

Implied volatility stands at 40%, near the middle of the six-month range, and has been mendering sideways since mid-September, initially with wide swings, but those have narrowed considerably since mid-November.

Options are pricing in confidence that about two thirds of trades will fall between $17.77 and $22.37 over the next month, for a potential gain or loss of 11%, and between $18.96 and $21.18 over the next week.

Call options are trading slowly, at only 14% of their five-day average volume. All of the action is on the put side, where volume is 23% above the five-day average. This looks to me as though traders are betting on the downside.

The entirety of the breakout happened in the first hour of trading today. Since then until this writing two hours before the close, the price on today's half-hour chart has been seesawing in a narrow range near the top of the fair-price zone, with runs from $19.87 and $20.11, encompassing about two-thirds of transactions at the most traded price, $20.05.

Horton next publishes earnings on Jan. 23. The stock goes ex-dividend next March with a quarterly payout at today's prices yielding 0.75% annualized.

Decision for my account: I've put a hold on my trading and reduced exposure sharply until the budget and debt-ceiling negotiations are worked out in Washington. 

Even if I were trading, and even though DHI has met my rules for a bull trade, I wouldn't take the trade today. The high put volume compared to calls and the fact that the price hasn't budged since the first hour of today's session gives me pause, big time.

A mentor once told me that success in trading is defined by whether the trader followed the rules (whatever rules he or she might have devised). My decision violates my rules. So, in penance, I shall hang my head in contrition as I sip my second pot of green tea, muttering to myself, "I am a bad, bad trader."


My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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