Schaeffer's Trading Floor Blog

Weekly Contrarian: Why PulteGroup, Inc. (PHM) Bulls Should Be Wary

An uptick in PHM call activity could stunt any attempts at an advance in the near term

by 9/19/2013 1:19 PM
Stocks quoted in this article:

Homebuilders have had a tough time of late, as evidenced by the 14.2% PulteGroup, Inc. (NYSE:PHM) has shed during the past six months. For the sake of comparison, the equity nearly tripled in value in 2012. A recent article in Fortune examines whether this pullback -- which comes on the heels of last year's impressive rally and amid a static market for new homes -- could create an appealing entry point on the sector. "If homebuilders are 30% cheaper than they were a few months ago, and their future success is still probable, then the stocks should be even better buys today." In fact, the article proclaims PHM to be a name within the sector that could produce "the highest potential gains."

Contrarian Perspective

As touched upon, PHM has not performed well on the charts over the last six months, with the stock last seen lingering near $17.76. Additionally, PulteGroup, Inc. (NYSE:PHM) has underperformed the broader S&P 500 Index (SPX) by roughly 25 percentage points within that same time frame. This negative price action has been highlighted by the equity's 80-day moving average. This once-supportive trendline has been ushering PHM lower since June, and quickly put the kibosh on yesterday's rally attempt. In spite of these technical troubles, the stock's Relative Strength Index (RSI) of 65 is nearing overbought territory -- suggesting short-term struggles could be on the horizon.

Meanwhile, expectations toward the recent underperformer remain high in the options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), PHM's 50-day call/put volume ratio of 2.27 ranks in the 72nd percentile of its annual range. In other words, calls have been bought to open over puts at an accelerated clip over the past 10 weeks.

Additionally, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.66 ranks in the 15th percentile of its annual range. Simply stated, short-term speculators are more call-heavy than usual toward PHM. While the stock may indeed be positioned to resume its uptrend in the long term, this heavy accumulation of call open interest -- particularly at out-of-the-money strikes -- could serve as a contrarian headwind in the near term.

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