Existing Home Sales Plunge Opening Possible Profits In XHB Trades for Dec 23 2015

2015 has been a particularly profitable year in specific sectors. One of those has been the home builders sector. I typically trade the home builders using the XHB ETF and Toll Brothers Stock which is the nation’s largest home builder.  In fact over the past  8 years one of the trades that I recall most has been buying and selling Toll Brothers in 2008, 2009 and surprising in 2011 when many analysts felt that the housing market was ending its recovery. All of those were excellent times to be picking up shares in Toll Brothers.

Today’s housing data disappointed economists who are continuing to predict further advances in the housing market. Instead what we saw today was a decline of 10.5% in existing home sales. Analysts comments today after the release of the existing home sales turned bearish almost immediately. These numbers pointed to the first annual decline since September 2014.

I don’t think these numbers point to a return to a slide in housing such as we saw during the credit crisis. Instead a lot of the decline was brought about by new home buying regulations that came into effect which lengthens the time to closing. Since this started in November many of the sales may have been pushed into December. We won’t know until the December numbers are released whether there is an actual decline underway in existing home sales.

Also the number of existing homes being offered by sellers declined in many urban markets making it more difficult to find properties for buyers. One thing today’s numbers did show is that housing prices are continuing to climb. Another statistic was the number of homes in distress sales rose from 6 percent in October to 9 percent in November. That increase shows the confidence banks have in the housing recovery as they are releasing more distressed properties for sale which is what pushed up the percentage for November, rather than an actual increase in the number of new distressed properties.

Altogether then, the Existing Home Sales numbers for November are actually not bad but investor perception may result in a decline in the XHB and even Toll Brothers over the next few trading days which could open up some trading opportunities.

XHB Chart

The XHB Chart for example shows the home builder index is sitting below the August and October lows, aside from the panic low of August 24 which took the XHB down to $31.70 briefly before closing the day at $35.62.

I prefer selling options so with the XHB this low, I have no interest in selling call options as the chance of a rebound rally is, I would think, fairly strong. Instead I prefer selling put options.

XHB 6 month chart to Dec 22 2015

XHB 6 month chart to Dec 22 2015

I would prefer to sell the $32.50 put strike which for Jan 125 expiry was trading for 24 cents. Even setting up credit put spreads would be a better choice than selling call options. The recovery of the index over the past two days has decreased the put premium I can earn but a possible dip on Wednesday or Thursday morning could open up a trading opportunity.


 

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Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.