Book Profits On Homebuilder Stocks As The Housing Bubble Has Re-Inflated

|
Includes: DHI, KBH, LEN, PHM, TOL
by: Richard Suttmeier

Summary

Homebuilder confidence rose five points in December to a reading of 74, the highest level since July 1999.

Single-family housing starts are up 8.7% year over year.

New home sales reached a post-recession high in November up 9.1% year over year to the highest pace since July 2007.

Home prices haverisen by 52% since the March 2012 low.

Wall Street, the National Association of Home Builders and most experts on the housing market expect the vibrant recovery to continue in 2018. I disagree with this notion just as I did back in mid-2005 a year before the housing bubble popped.

The new year will begin with two major uncertainties: the effects of the Tax Cuts and Jobs Act, and a tightening of monetary policy by the Federal Reserve. In short, the $10,000 limit on property taxes and state and local taxes as tax deductions. And, as the Fed raises the federal funds rate, all loans tied to the prime rate will be a direct hit on homeowners.

Let’s look at the key housing data recently released.

On Dec. 18, the National Association of Home Builders reported that their Housing Market Index rose five points in December to 74, the highest reading in more than 18 years.

On Dec. 19, the Census Bureau reported that single-family housing starts, the NAHB benchmark, rose by 5.3% in November to a seasonally-adjusted annual pace of 930,000 units, up 8.7% year over year.

Monthly Graph of the NAHB HMI vs Single-Family Housing Starts

Housing Sentiment Vs Single Family Starts Courtesy of the National Association of Home Builders

The NAHB HMI at 74 in December is shown in blue with the scale at the left side of the graph. Single-family housing starts is in red and is shown on the right side of the graph. This reading is for October. Note that the HMI is leading the rise in starts by a significant margin, which should be considered a warning. When the index was 72 in June 2005, single-family starts were approaching 1.8 million units, not struggling at about half that pace.

On Dec. 22, the Census Bureau reported that new home sales reached a post-recession high in November with a reading of 733,000 units sold on a seasonally adjusted basis. This was the highest pace since July 2007 and up 9.1% year over year.

New Home Sales In November On Dec. 26, the S&P CoreLogic Case-Shiller Indices shows that the 20-city composite of home prices rose by 6.4% year over year in October up from 6.2% in September. This index bottomed in March 2012 after declining 35.1% since July 2006. The latest reading is 52% above the low and just 1.3% below the peak. This is a re-inflated bubble.

Home Price Indices Here’s a scorecard for the five major homebuilders

Scorecard For The Five Major Homebuilders Let’s look at the weekly charts and key trading levels

D R Horton (DHI) set an all-time intraday high of $51.79 on Dec. 19.

Weekly Chart For D R Horton Courtesy of MetaStock Xenith

D R Horton has a positive but overbought weekly chart with the stock above its five-week modified moving average of $48.82, and above its 200-week simple moving average of $29.76, considered the “reversion to the mean” last tested during the week of Feb. 12, 2016 when the average was $23.31. The 12x3x3 weekly slow stochastic reading is projected to end this week at 94.21 well above the overbought threshold of 80.00, and above 90.00 as an “inflating parabolic bubble”.

Trading Strategy: Reduce holdings by 50% on strength to my projected 2018 annual and semiannual risky levels of $53.22 and $56.21, respectively.

KB Home (KBH) set a multiyear intraday high of $32.20 on Dec. 27, but remains in bear market territory versus its July 2005 high of $85.45.

Weekly Chart For KB Home Courtesy of MetaStock Xenith

KB Home has a positive but overbought weekly chart with the stock above its five-week modified moving average of $30.02, and above its 200-week simple moving average of $17.04, considered the “reversion to the mean” last tested during the week of Feb. 10, 2017 when the average was $15.97. The 12x3x3 weekly slow stochastic reading is projected to end this week at 95.65 well above the overbought threshold of 80.00, and above 90.00 as an “inflating parabolic bubble”.

Trading Strategy: Reduce holdings by 50% on strength to my projected monthly risky level for January at $34.08.

Lennar (LEN) set a multiyear intraday high of $64.42 on Dec. 26, but remains below its July 2005 high of $67.68.

Weekly Chart For Lennar Courtesy of MetaStock Xenith

Lennar has a positive but overbought weekly chart with the stock above its five-week modified moving average of $61.06, and above its 200-week simple moving average of $46.41, considered the “reversion to the mean” last tested during the week of Jan. 6, 2017 when the average was $42.42. The 12x3x3 weekly slow stochastic reading is projected to end this week at 90.80 well above the overbought threshold of 80.00, and above 90.00 as an “inflating parabolic bubble”.

Trading Strategy: Reduce holdings by 50% on strength to my projected 2018 semiannual and annual risky levels of $69.00 and $75.59, respectively.

PulteGroup (PHM) set its multiyear intraday high of $34.60 on Nov. 30 and remains in bear market territory versus its all-time intraday high of $48.22 set in July 2005.

Weekly Chart For PulteGroup Courtesy of MetaStock Xenith

PulteGroup has a positive but overbought weekly chart with the stock above its five-week modified moving average of $32.48. The stock is above its 200-week simple moving average of $21.03, which is the “reversion to the mean” last tested during the week of Jan. 27, 2017 when the average was $19.36. The 12x3x3 weekly slow stochastic reading is projected to end this week at 90.41 well above the overbought threshold of 80.00, and above 90.00 as an “inflating parabolic bubble”.

Trading Strategy: Reduce holdings by 50% on strength to my projected 2018 annual risky level of $37.71.

Toll Brothers (TOL) set its multiyear intraday high of $51.08 on Dec. 4 and is in correction territory versus its July 2005 all-time intraday high of $58.67.

Weekly Chart For Toll Brothers Courtesy of MetaStock Xenith

Toll Brothers has a neutral weekly chart with the stock above its five-week modified moving average of $46.96. The stock is above its 200-week simple moving average of $34.76, which is the “reversion to the mean” last tested during the week of Feb. 24, 2017 when the average was $33.33. The 12x3x3 weekly slow stochastic reading is projected to slip to 75.25 this week down from 79.90 on Dec. 22, falling below the overbought threshold of 80.00.

Trading Strategy: Reduce holdings by 50% on strength to my projected 2018 annual risky level of $54.92.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: Seeking Alpha pays for exclusive articles. Payment calculations are based on a combination of coverage area, popularity and quality.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here