Friday, December 28, 2007

Its time to load MDC puts again

For most of the past 6 months MDC has been channeling lower bound between its falling 50 dma and a trend line (shown in blue) . That was until it reached and broke its former 4 year low at $38.26. When this break occurred the volume increased as MDC began to slide faster below the lower end of the channel. But then the entire homebuilding sector began a magical "this is really the bottom" rally like all great bear markets do about once a year and MDC had its biggest rally of 2007, at 30%+ gain in two weeks.

Well now that thats behind us MDC appears to have resumed its usual form. After new home starts fell to a 12 year low today which was much worse than expected, MDC has slipped back below that former 4 yr low, closed below its 50 dma and other indicators are giving big green lights to short the heck out this stock again.

I think the worst case scenario is that MDC will just resume its relatively boring, yet reliable, channel lower. The best case scenario would be that MDC really breaks badly as the market begins to accept that the homebuilders won't make a profit for a very long time, the ones that don't go bankrupt that is. I have talked about this worse case scenario before and my price objective remains at roughly $27 but it could certainly go much lower. Click here for the weekly chart from my last post on MDC.

Oh and by the way, the head honchos at MDC decided that they deserved some pretty hefty bonuses this year (2 million for the top guy), this is after the company they run had its worst quarter ever. They also decided that despite the 40% decline in company revenue they would keep their salaries unchanged. What a worthless investment MDC is.

Disclosure: I own a ton of MDC Jan 35 puts


eh said...

Good luck with those puts, but I'd be more comfortable holding them if they were out a couple of months, say March or April, even February. I've been short this stock for a while now -- long enuf to be fed up with paying the dividend -- and it always seems to catch a bid. Too many bottom callers/fishers chasing the HBs and financials (all this 'white knight' stuff, including sovereign wealth funds). I won't cover yet but I now wish I had done so around 32, and then gone long for the ride back up to 40 to short again there. I will be trading these downtrodden sectors more this year.

pythagoruz said...

Yeah I think buying the March puts is a much safer and smarter way to play MDC.

But I had a few January 35's leftover from November (when they were like buying the March puts now) so I just decided to add those instead. It looks to me like MDC is going to be dropping pretty fast here in the next week or two so the Jan 35's might in fact perform much better, albeit for a higher risk.

"Too many bottom callers/fishers chasing the HBs and financials (all this 'white knight' stuff, including sovereign wealth funds)"

Yes, and we won't see a bottom until those folks run for the hills and MDC capitulates in volume.

pythagoruz said...

Sold my January 35's today for a hefty profit and bought some March 30p at 1.65.