Michael Shulman

Homebuilders Helped Us Construct Profits

    Tweet This

There's an old traders' saying that, "A rising market floats all boats." But when it's a specific sector that's falling apart, a similar logic holds true. That is, when the biggest names in an industry start to sink, the ripple effect causes the pain to spread to other names with nowhere to hide.

For example, several homebuilding stocks got killed in the subprime-mortgage debacle. Early on in the game, the best of the worst names -- D.R. Horton (DHI), Centex (CTX), Pulte (PHM) and Lennar (LEN), to name just a few -- had their foundations literally rocked out from under them, and my ChangeWave Shorts subscribers made a lot of money by buying put options on those stocks and riding them down.

However, our momentum for making profits on the short side was only starting to -- forgive the expression -- build.

You might have even wondered how to make money in a sector that's still finding a bottom when so many of its stocks have fallen off a cliff. But there's no need to skip the party if you've come late to it -- in the case of the housing sector, the pickings at the short-side buffet were anything but slim.

There's another saying I like to use: "When you hear hoofbeats, don't think zebras." It's often used in the medical profession, to remind doctors not to overlook the obvious. So, when we were looking for the next batch of stocks that were going to fall, common sense and some digging told us to look at where the housing contagion was going to spread.

Meaning, don't aspire for some exotic solution to making money on the short side when the obvious answer is horses -- or, in this case, dog stocks.