Are we finding the real estate stock bottom as home prices fall back to 2003 levels? Home prices may well have bottomed out but how about real estate stocks? Traders look to the future and, thus, the market commonly anticipates stock prices, commodity prices, and real estate prices. Finding the housing market bottom will be useful in buying property but finding the real estate stock bottom is the name of the game for stock traders. Here we look at four large United State home building companies. If these four stocks are any indication, finding the real estate stock bottom may have been an issue for late last year. On the other hand all of these stocks are trading above their 52 week low and below their 52 week high so the issue may still be in question. We look at Hovnanian Enterprises (HOV), Lennar Corporation (LEN.B), Beazer Homes, and Toll Brothers, Inc (TOL). Considering the prices of a couple of these stocks, this exercise does not have to do with how to trade penny stocks but rather how to anticipate a stock rebound.

Hovnanian Enterprises HOV trades current at $2.70 after opening 5 cents higher after Ben Bernanke announced that the Fed will continue to stimulate the economy. The stock has traded between $0.89 and $3.69 a share in the last fifty-two weeks. This is a stock that peaked at $72.30 in the middle of 2005.

Lennar Corporation (LEN.B) gapped up a dollar and fifty cents on the statement of the Fed Chairman and is trading at $22.64 a share. Its 52 week range is $8.95 to $22.64. The stock rose to $62.59 in the middle of 2005.

Beazer Homes gapped up 8 cents to $3.38 a share on the news from the Fed. It has traded in the $1.35 to $4.79 range in the last 52 weeks and traded at a high of $79.12 at the very end of 2005.

Toll Brothers, Inc. jumped from a $23.65 closing to any early day $24.51 on Mr. Bernanke’s statement that more help for the economy is forthcoming. Toll Brothers peaked at $57 in the middle of 2005.

Basic factors that affect the housing market, and finding the real estate stock bottom, include jobs, inflation, and consumer confidence. However, market sentiment also comes into play. When stock traders believe that a rally in eminent they will buy and when they believe that a collapse is eminent they will sell. While home prices are a third below their 2006 highs the home builder stocks we cite above have fallen nearly two thirds of their peak values. The exception is Hovnanian which has fallen more than ninety percent. Finding the real estate stock bottom is important for two reasons. First, of all no one wants to be trading a stock that has flat-lined. Buying cheap stocks is only profitable if the stock is about to rise in price. Secondly, if the past is any indication of the potential of these stocks, there could be a lot of profit in finding the real estate stock bottom and selling on the rise. As always, fundamental and technical analysis are essential to picking the right stock at the right time. As always we are not recommending these stocks or home builder stocks in general but are offering this profitable trading tip as an example of thinking through which stocks to trade.

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Success in trading stock indexes depends upon choice of index, fundamental analysis of the market sector or economy that the index represents and attention to market sentiment. Here is a brief overview of the business of trading stock indexes. Our goal is to help the trader devise a trading system that leads to success in trading stock indexes and helps avoid simply trying to outguess the market.

What the Stock Index Contains

There are a wide variety of stock indexes. There are stock indexes that include stocks from all parts of the world or selected parts of the world, and there are stock indexes that include only stocks from a given nation. Stock indexes such as the Standard and Poor’s 500, the Nikkei 225, the RTSI, the SENSEX, and the FTSE 100, represent large cap companies in the USA, Japan, Russia, India, and the United Kingdom, respectively. There are stock indexes that represent individual sectors of the stock market. For example, The Morgan Stanley Biotech Index represents thirty-six US stocks in the biotech sector while the Wilshire US REIT index represents more than eighty REIT’s or real estate investment trusts. If you are trading the Russell 2000 you are trading an index that represents the bottom two thousand stocks in the Russell 3000 index. These are mid and small cap stocks with market caps of usually no more than a billion and a half dollars.

What Drives the Constituents of the Stock Index

To a degree all stock indexes are driven by the economy. However, large indexes such as the Standard and Poor’s 500, the Nikkei 225, the RTSI, the SENSEX, and the FTSE 100 typically rise as fall with the national or global economy. If you are trading the SPY, the SPDR exchange traded fund that tracks the Standard and Poor’s 500 you will expect to see a rise in the index when news from Europe implies a resolution of the debt dilemma or when US employment figures are improving. You will expect to see a fall in the S&P 500 and the SPY when trade figures for the USA show increasing red ink or when congress is unable, again, to deal with an extension of the US debt ceiling. Many traders who follow events in Europe, for example, find as much success in trading stock indexes as in trading the Euro.

When to Buy and When to Sell a Stock Index

Success in trading stock indexes depends upon a clear view of the fundamentals of nation or market sector represented by the individual stock index. Success in trading stock indexes also depends upon accurate and up to date technical analysis of emerging market sentiment.

How to Trade a Stock Index

Traders keep an eye on general economic indicators and/or factors that drive a given market sector in order to obtain success in trading stock indexes. In addition, traders follow the big companies in any given sector. These indexes are representative of a basket of stocks. The index tracks the collective movement of stocks in the index and is a means of diversification. However, if one really large cap stock like Exxon Mobil or Chevron takes a big hit the index will adjust accordingly and rapidly. Having a clear idea about just what is happening to the individual components of the index is a clear path to success in trading stock indexes. Options trading often focuses on stock indexes. How to profit from stock option trades of indexes is commonly to follow market sentiment with technical analysis tools and scalp profits from incremental moves in the market. With options trading one reduces investment risk down to the price of an options contract and enjoys a degree of leverage, depending upon contact price.

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With high natural gas production and a historic warm winter, where are the natural gas futures trading profits? Folks across the northern USA are reveling in the mildest winter in many years. They are also using their furnaces less! Natural gas futures for April delivery have fallen from around $5.50 to around $2.25 per million BTUs (British Thermal Units). The excess supply (nearly fifty percent higher than at this time a year ago) held by natural gas suppliers is in large part why prices have plummeted. Weather forecasters tell us that the unseasonably warm weather will continue over the eastern United States through the end of March, the end of the “heating season.” While near term futures reflect the current glut in natural gas supplies prices out a year for April 2013 delivery run about $3.30 for a million BTUs. April 2014 futures are $3.74. In the longer term traders expect prices to rise again. Thus April 2020 futures are around $5.20 per million BTUs. Prices for physical delivery at the Henry Natural Gas Hub in Louisiana are considered a benchmark. Next day delivery prices at the Henry Hub dropped by ten cents over just a week recently as a “real” northern winter failed to materialize this year. Those who saw this coming and sold futures at old prices are reaping very nice natural gas futures trading profits. There is little risk of insider trading upsetting this market as the fundamentals are out there for everyone to see.

Washington Is Happy

The United States has reclaimed its status as the world’s leading natural gas producer and may, indeed, resume its position as the world’s leading oil producer as new technologies fuel increased oil extraction from previously impossible formations. The USA has reduced its dependence on foreign oil from 55% to 45% of crude oil consumption, a million barrels a day. More fuel efficient cars and increased insulation of homes have also helped reduce energy requirements. On the other hand the US economy is still just coming out of the worst recession in 75 years. When factories start humming they will need more fuel and both oil and natural gas prices will likely rise. A distant but real problem that bothers Washington and drives oil prices is the risk of an armed confrontation with Iran over its nuclear power aspirations. Although natural gas traders are also concerned about the economy and world affairs they try to adopt a dispassionate attitude. To make natural gas futures trading profits a trader needs to follow fundamental and technical analysis of gas prices and not invest in what they “hope” will happen.

How Natural Gas Is Traded

Natural gas futures are traded on the NYMEX, the New York Mercantile Exchange. It is traded in unites of 10,000 million BTU’s while prices are quoted per million BTUs. A penny change in the quoted price is difference of $100 in natural gas futures trading profits. Futures contracts are available for the 36 months from the current date. Companies in the energy business may well take physical delivery of natural gas. Traders in search of natural gas futures trading profits will exit their contract at the most opportune time price to contract expiration, taking their profit or loss. A margin account is required for trading natural gas futures. As with all profitable futures trading , do not trade if you do not understand what you are doing.

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Last year’s torrential rains across Latin America are over and things have dried out, a little too much. For commodity traders the most recent news is that soybean futures are up on news of South American drought. The combination of high global demand for food, the prospect of diminished production capacity, and futures trading make for profit potential. Traders may simply buy futures contacts so soybean futures are up on news of South American drought. More cautious traders may trade options on soybean futures, hedging investment risk while still taking advantage of the leverage that options trading offers. A big part of how to trade commodities is fundamental analysis of weather trends as well as global supply figures. However, when the market starts to move, other speculators buy and sell futures with the intent of making a profit. As often as not futures prices can overshoot price targets that fundamentals might predict. As such traders always need to keep an eye on market sentiment.

Global Demand for Food

The population of the world is growing. And, many previously poor nations are becoming wealthy and eating better. A recent news item noted that bikini sizes in Brazil are getting larger as the lithe young girl from Ipanema has filled out due to an abundant supply of calories. All of this leads to a higher global demand for food. These factors are demographic and strong. Trading with this information in mind is not trying to outguess the market . The only questions are how much and how soon.

Diminished Production Capacity

As urban areas grow, previously productive farm land gets covered up with suburbs, concrete shopping center parking lots, and highways. And there is always the weather. This last year was historic with flooding across much of South America. And then the rains stopped and the dry season, South American summer, arrived. There has been no rain in some areas for months, just as crops should be ripening. Yields will likely be down across much of Brazil and Argentina. This situation is not as urgent as what was caused by the recent draught in Eurasia but sufficient to for us to see soybean futures rise on news of South American drought. This is similar to trading a disaster such as the Japanese tsunami or a hurricane in the Gulf of Mexico, except that a drought develops slower that than the arrival of a hurricane or tsunami wave.

Futures Trading

Futures trading allows producers and buyers of grains, meats, and other commodities to hedge investment risk. It allows speculators to profit from careful analysis of fundamentals and astute technical analysis of market sentiment. Although many futures traders simply buy or sell futures contracts in order to guarantee a future price many choose to purchase options in order to maintain the choice as to whether or not they will want to buy or sell a given futures contract. The advantages of options trading are that the buyer of an options contract limits his risk to the price of the contract and that he can profit from the often substantial leverage that buying a cheap options contract provides when there is an otherwise unexpected swing in commodity prices.

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Home sales are edging up according to the National Association of Realtors. What do rising home sales tell us about the economy and about stock trading opportunities? Apparently more folks in the USA signed more sales agreements in January than in any month since 2010. The stock market took this as good news and stocks went up. If this is the start of a recovery of the housing market traders will want to watch home builders and home improvement companies such as Home Depot and Lowe’s. If the housing recovery is real it could mean good things for the economy in general and that would be reflected in stocks across the board. Traders will be wise to engage in technical analysis of the market at this point, however, as some analysts believe that the stock market has moved out ahead of what fundamentals will support. A market correction, like last year could easily wipe out all of January’s impressive gains.

Rising home sales tell us that people have money and can get credit. It also tells us that people are becoming more optimistic than any time since the 2008 market crash. If the housing market takes off possible good investments could include any of the large US homebuilders such as D.R. Horton, Pulte Homes, Lennar Corp., Centex Corp., KB Homes, Beazer Homes, Hovnanian Enterprises, Ryland Group, M.D.C. Holdings or NVR. Seeing an opportunity for recovery trading , traders may look at Lowe’s, Home Depot and Menard’s, not to forget Walmart and Target. Although people buy and build homes they need the things of life that go inside as well.

Options trading may be an attractive way to approach rising home sales. It is common for the market to get ahead of itself. It is also common for the market to overlook opportunities. An advantage of buying calls or puts on stocks is that one’s risk is limited to the price of the options contract no matter how high a stock might rise or how low it might fall. Also, buying options can be an excellent means of leveraging investment capital as one can simply exit an options contract at the most profitable moment without ever buying or selling a stock. Rising home sales got the attention of the market the other day, ever so briefly taking attention away from the European debt melodrama. Anyone expecting to see a spectacular run up of stock prices needs to keep in mind the monumental debt burdens in the US and Europe and the likelihood of austerity measures in Europe causing a recession on the continent over the next year or two. Those who see rising home sales need to look at fundamentals as well as market sentiment and avoid trying to outguess the market . Although stocks may rise and fall based on the news they either stay up or stay down based on solid fundamentals. As usual we are not suggesting any specific stock or stocks but offering a way to approach trading stocks for a profit. Always avoid trading stocks that you do not understand.

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