Trading Strategies For 5 Major Homebuilder Stocks

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

D. R. Horton and PulteGroup remain in correction territory despite holding key levels on weakness.

Lennar, KB Home and Toll Brothers remain deep into bear market territory and they too held key levels on weakness.

Homebuilder confidence remains elevated, but the buyer traffic measure slips below neutral.

Single-family housing starts are stabilizing while new home sales continue to slump.

Here Are Key Housing Market Data

On Aug. 15, the National Association of Home Builders announced that its Housing Market Index for August slipped a tick to 67, still well above the neutral reading of 50, but the buyer traffic fell 3 points to 49, falling below the neutral reading of 50. Homebuilders continue to boast about strong demand for homes on steady job growth and income gains, but the NAHB is equally concerned about affordability due to rising construction costs, labor shortages and availability of favorable lot locations.

On Aug. 16, the Census Bureau reported that single-family housing starts increased slightly to 862,000 units in July, up from 858,000 in June. Keep in mind that the January 2006 peak was above two million single-family units.

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

NAHB Housing Market Index Courtesy of the National Association of Home Builders

The NAHB HMI at 67 in August is shown in blue with the scale at the left side of the graph. Single-family housing starts are shown in red with the scale on the right side of the graph. This reading is the original one for June.

Note that the HMI continues to lead the rise in starts by a significant margin which remains a warning. When the index was 72 in June 2005, single-family starts were approaching 1.8 million units, now struggling at half that pace.

New Home Sales

On Aug. 23, the Census Bureau reported that new single-family home sales slipped by another 1.7% in July to an annual rate of 627,000 units, the slowest pace since October 2017. The NAHB is concerned that the lack of housing inventory, which it says, is pushing up home prices. The median sales price rose to $328,700. This is hurting affordability and causing prospective buyers to delay purchasing decisions. In July 2005 this measure was approximately 1.3 million units, so current sales remain well below potential.

When I last wrote about the homebuilders, my theme was “Time To Rent But Not Own Homebuilder Stocks.” Let’s see how this notion worked out.

Here’s A Scorecard for Five Major Homebuilders

Scorecard for Five Homebuilders Let’s look at the weekly charts and key trading levels.

D. R. Horton (NYSE:DHI)

Weekly Chart for D R Horton Courtesy of MetaStock Xenith

The weekly chart for D. R. Horton remains positive with the stock above its five-week modified moving average of $43.76 and well above its 200-week simple moving average of $33.53, which is also the ‘reversion to the mean.’ The 12x3x3 weekly slow stochastic reading is projected to end this week at 74.67, up from 69.68 on Aug. 17.

Trading Strategy: Buy weakness to my monthly value level of $38.02. If you bought on weakness you could have reduced holdings on strength to my annual pivot of $45.45.

KB Home (NYSE:KBH)

Weekly Chart for KB Home Courtesy of MetaStock Xenith

The weekly chart for KB Home will be upgraded to positive if the stock closes Friday above its five-week modified moving average of $24.92. The stock is above its 200-week simple moving average of $18.94, which is considered the ‘reversion to the mean.’ The 12x3x3 weekly slow stochastic reading is projected to end this week at 20.34, moving above the oversold threshold of 20.00.

Trading Strategy: A long position could have been set on weakness my monthly value level of $23.60. Buy weakness to my semiannual and annual value levels of $22.85 and $22.52, respectively, and reduce holdings on strength to the 200-day simple moving average at $28.44, which is not shown on the weekly chart.

Lennar (NYSE:LEN)

Weekly Chart for Lennar Courtesy of MetaStock Xenith

Lennar will have a negative weekly chart if the stock ends this week below its five-week modified moving average of $52.43. The stock tested and held its 200-week simple moving average during the week of June 29, providing a buying opportunity at its ‘reversion to the mean.’ The 12x3x3 weekly slow stochastic reading is projected to end the week at 48.70, down from 50.39 on Aug. 17.

Trading Strategy: Buy weakness to my monthly value level of $49.02 and reduce holdings on strength to my quarterly and semiannual risky levels of $58.16 and $58.84, respectively. My annual risky level is $70.88.

PulteGroup (NYSE:PHM)

Weekly Chart for PulteGroup Courtesy of MetaStock Xenith

PulteGroup has a negative weekly chart with the stock below its five-week modified moving average of $29.01. The stock is well above its 200-week simple moving average of $22.95, which is the ‘reversion to the mean.’ The 12x3x3 weekly slow stochastic reading is projected to end this week at 23.68, down from 35.84 on Aug. 17. Note how my annual pivot of $29.23 has been a magnet since the week of Feb. 9.

Trading Strategy: Buy weakness to my semiannual and monthly value levels of $27.08 and $25.64, respectively, and reduce holdings on strength to my quarterly risky level of $32.53.

Toll Brothers (NYSE:TOL)

Weekly Chart for Toll Brothers Courtesy of MetaStock Xenith

Toll Brothers will be upgraded to positive if the stock ends the week above its five-week modified moving average of $36.65. The stock is above its 200-week simple moving average of $36.02, which is the ‘reversion to the mean’ which has been a magnet for the last five weeks. The 12x3x3 weekly slow stochastic reading is projected to end this week at 17.18, but will rise above the oversold threshold of 20.00 as August comes to an end. Note how my semiannual pivot of $35.36 has been a magnet for the last three weeks.

Trading Strategy: Traders could have bought a position on weakness to my semiannual value level of $35.36. Buy weakness to my monthly value level of $32.08 and reduce holdings on strength to my annual and quarterly risky levels of $48.60 and $49.36, respectively.

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.