New Trade $XHB – Mission Accomplished Mr. Bernanke, Housing Bubble Re-Inflated!

by Dan February 22, 2013 2:59 pm • Commentary

Here is a preview of what I will discussing tonight on Options Action on CNBC at 5PM:

Based on the housing market headlines I’ve seen in the past year, you’d think housing prices were increasing 20% a year or something.  The “recovery” is only a recovery in comparison to the past few years.  It’s still a housing market depression when viewed in the context of the past 25 years.  New Home Sales over the past 25 years:

25 year chart of New Home Sales, Courtesy of Bloomberg
25 year chart of New Home Sales, Courtesy of Bloomberg


The “recovery” is not looking so strong anymore.

Meanwhile, the housing-related stocks are trading like it’s boom times in the market.  Enis touched on this in his Macro Wrap post on Feb. 20th, writing:

The housing sector is one of the most overvalued sectors in the U.S. stock market, for several reasons.  Here are 3 brief points on why I’m bearish on TOL and U.S. homebuilders as a whole:

1)  This is a housing recovery, not a housing boom.  The housing market has clearly improved in the past 12 months, but TOL’s current selling pace in its communities is still below its 25 year average
2)  Meanwhile, the stock is priced for more than a boom.  The stock is trading at 2005 levels, when the stock earned more than $4 per share.  In 2013, it’s slated to earn around $1.
3)  Relative valuation for other sectors much better than homebuilders like TOL.  If you want to get long the U.S. housing market, buy Toyota or Ford.
Granted, the housing stocks have been overvalued for a while.  The technical picture is starting to look quite negative though, and the shorts might finally have their day in the sun.
The 5 year weekly chart of XHB shows an ETF that has advanced more than 100% from its Oct. 2011 lows.  That’s for an ETF with 34 close to equally weighted components, more than doubling in less than 18 months.  The chart shows decreasing volume on each push higher, and this week is the highest volume week in 2013 as sellers overwhelmed buyers:
5 year weekly chart of XHB, Courtesy of Bloomberg
5 year weekly chart of XHB, Courtesy of Bloomberg
A move back to the $25 breakout level seems like a decent possibility if the broader market sells off.
Vol Snapshot:   As far as volatility goes, it’s a pretty good time to scoop some if you think the market is about to head lower. Here’s how XHB’s vol has traded over the past 2 years with IV30 in red:
Screen Shot 2013-02-22 at 1.03.03 PM
LiveVol Pro
TRADE: XHB ($27.85) Bought the Apr 27/25 Put Spread for .45

-Bought 1 Apr 27 Put for .70

-Sold 1 Apr 25 Put at .25

Break-Even on Apr Expiration:

-Profits of up to 1.55 between 26.55 and 25 max profit of 1.55 at 25 or below

-Losses up to .45 between 26.55 and 27, max loss of .45 at 25 or above

Trade Rationale:  If the Market is in a topping phase, which I believe it is, I want to get short exposure to sectors that I think have overshot on the upside, or in the case of housing and related sectors, already discount a good bit of the supposed recovery.