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Chart Advisor: Keeping Afloat

Investopedia

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Tuesday, 21st September, 2021

1/ Stocks avoid sinking further 

2/ Homebuilder industry follows market lower

3Lennar investors pessimistic 

4/ The bottom line

1/ Stocks Avoid Sinking Further

Indexes fell from an early rally to post mixed results, as the market anticipates the economic projections from the Federal Reserve meetings on Wednesday. Speculation continues to swirl surrounding the possible default of the Chinese real estate developer Evergrande. Fears center on the possibility of a default triggering a liquidity crisis with possibly global effects. U.S. markets will look for the Fed to signal when tapering of bond purchases may begin to combat rising inflation.  

After posting its largest single day loss since May, the S&P 500 (SPX) closed with a marginal loss, fading in the last hour. The tech-heavy Nasdaq 100 Index (NDX), Dow Jones Industrial Average (DJI) and Russell 2000 (RUT) all had similar activity in the last hour, with IWM and NDX managing to barely finish above opening prices. The choppy day of trading signaled investors feel conflicted about which direction markets will trend. 

The chart below illustrates the performance of the NDX against the SPX. Both indexes have had an incredible recovery since March of 2020. Both indexes also experienced a similar September swoon last year, before racing to new highs in November. Investors could be fearing an end to the pandemic economic recovery.

2/ Homebuilder industry follows market lower 

It’s no secret that the housing market is red-hot. However, rising costs and supply and labor shortages have caused homebuilders to slow down building, prompting construction delays and further widening the gap between supply and demand. Single-family home construction is running at the slowest pace since 1995. This has been a boon for the homebuilder industry, as many equities have risen to unprecedented levels.  

The chart below compares the recent performance of several stocks of the industry against State Street’s Homebuilders ETF (XHB), which has risen 42% in the past year. The pandemic-induced supply chain bottleneck intensified in the second half of the year, further increasing the cost of materials—a cost that inevitably gets passed on to home buyers. 

Increased material costs have benefitted companies such as Floor & Decor Holdings (FND) and Builders FirstSource (BLDR), which have risen 76% and 74% in the past year, respectively. As homebuilding has slowed, it has cut into the bottom line of companies such as Toll Brothers (TOL), which has struggled to keep up with increased demand.  

3/ Lennar Investors Pessimistic

Also feeling the supply chain crunch is real estate developer Lennar (LEN). Investors bid down the share price of LEN ahead of its fiscal third-quarter earnings report, released Monday after the market closed. The share price has been on a downward trend in the month of September. LEN reported earnings per share (EPS) of $3.27 and $6.94 billion in revenues. Analysts expected $3.28 EPS and $7.26 billion in revenues. The company also lowered guidance for next quarter home deliveries, citing supply chain challenges that the company expects to continue.  

After relatively outperforming XHB of late, LEN has lagged its sector this month. While XHB has remained relatively steady, LEN has fallen well below its 20-day moving average toward the bottom of the volatility range, as depicted on the chart below. Market conditions could be affecting both LEN and XHB, however, the disappointed forward guidance that LEN provided has traders less optimistic. Option pricing for the next monthly expiration date, October 15, is priced for the LEN share price to continue to fall.  

4/ The Bottom Line

Buyers and sellers battled throughout the session, with sellers getting the upper hand in the last minutes of the session. However, most stocks seemed to hold prices and recent support levels. 

Originally posted on 21st September, 2021

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