The Interest Rate Boogie with the Homebuilders

We are finishing a volatile week for global markets and it most likely will stay that way until the ECB comes up with some announcement on Jan 22nd and/or the Greeks decide to elect a new government by the end of the month.  Earnings reports so far have been mediocre and without the promise of domestic QE, stocks have not been able to recover.  Short term things will stay choppy.

Once again I have Homebuilders leading the realized volatility averages (foreground).  Oil and Gas Explorers and Producers are showing the largest relative decrease in realized volatility (back left corner).  I don’t know if this is the end of the drop in oil prices but at least it is decelerating.  The group even had a few stocks up on the week which is a nice showing relative to the S&P 500.  The group is worth keeping an eye on now but I don’t expect any grand bounce.

3D volatility from OptionVision

Rates in the USA continue to tick down.  Why?  It seems we are the only one of the big 3 tradable economies in the West that are bothering to pay interest.  Germany and Japan are at or near 0.  That should be good for housing as current reports have huge numbers of home refinancings.

The Trade

A trade that could work would be to take advantage of KB Home (KBH) crush and sell a just in the money put since this name has already led the Homebuilders down.  Hedge with buying a put of same duration, but less money, in the Homebuilder ETF (XHB).  If we tank, close the XHB put spread for nice dough and pay the entry for KBH.

 With volatility so high everywhere one needs to be careful.  The last time we had Homebuilders leading in relative RV it made a power move up. Past performance does not guarantee future results, thus the slight hedge given our ugly market.

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