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How to Play the Coming Wave of Homebuilder Mergers

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A note this morning from a Citigroup analyst says Ryland and Beazer are among the most likely takeover targets in the Homebuilders sector, with DR Horton and KB Home among the most likely acquirers.

Oh, don't get too excited, this isn't a wave of positive mergers & acquisitions, it's about survival. According to Bloomberg, Citigroup analyst Josh Levin wrote that consolidation is "the elephant in the room" for homebuilders with increased size making it possible to cut cost of sales and administration.

With building permits slumping to the lowest level since May 2009 and unemployment near 10 percent, this is solely about cost savings. But don't mistake the economy for the stock market. The market likes cost savings. And taking a look at homebuilders through the lens of DeMark technical indicators there are reasons to believe some of the stocks are set to rise consolidation or not.

Ryland is showing signs of approaching technical exhaustion on both the daily and weekly charts using TD Sequential. Beazer recently recorded a daily buy setup. DR Horton recently recorded a weekly buy setup as well and KB Homes just confirmed a TD Sequential buy signal on the daily chart.

The simplest way to trade the move might be the SPDR S&P Homebuilders ETF (XHB), which yesterday confirmed a daily TD Sequential buy signal. Resistance is at 16.45.

SPDR Homebuilders ETF (XHB)
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POSITION:  No positions in stocks mentioned.

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