Home Builder Stocks Are Deep Into Bear Market Territory Which Is A Huge Economic Warning

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

Summary

Home Builders D. R. Horton, KB Home, Lennar, PulteGroup, and Toll Brothers peaked in January and all are now in the bear market territory.

Home Builder confidence remains elevated in October, but single-family starts for September continue to lag potential.

Home affordability remains a challenge on higher mortgage rates and elevated construction costs.

Here Are Key Housing Market Data

On Oct. 16, the National Association of Home Builders announced that their Housing Market Index for October picked up a tick to 68, well above the neutral reading of 50. The builders remain upbeat on demand given the strong economy and lower cost of lumber over the last three months. They are concerned about home affordability. If affordability does not stabilize, the demand for single-family homes could lose momentum going into 2019. The major concern is higher mortgage rates.

On Oct. 17, the Census Bureau reported that single-family housing starts decreased slightly to 871,000 in September down from 876,000 in August. The NAHB has not yet commented on lost production or sales in the wake of Hurricane Florence which covered about 12% of the country's home building areas. It's too soon to access the damage from Hurricane Michael. Keep in mind that at the January 2006 peak about two million single-family units were under construction.

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 68 in October 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 August. 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.

Here's A Scorecard for Five Major Home Builders

Scorecard For Five Major Homebuilders

Let's look at the weekly charts and key trading levels.

D. R. Horton (DHI)

Weekly Chart For D R Horton

Courtesy of MetaStock Xenith

The weekly chart for D. R. Horton is negative with the stock below its five-week modified moving average of $40.80 and above its 200-week simple moving average of $34.21 as the "reversion to the mean" was 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 declining to 30.31, down from 40.88 on Oct. 12. When 2018 began, the stock set its all-time high with the stochastic reading above 90.00 as an "inflating parabolic bubble" providing a huge warning.

Trading Strategy: Buy weakness to my monthly value level of $36.65 and reduce holdings on strength to my semiannual and annual risky levels of $44.56 and $45.45, respectively. Selling this range has been the strategy since February.

KB Home (KBH)

Weekly Chart For KB Home

Courtesy of MetaStock Xenith

The weekly chart for KB Home is negative but oversold with the stock below its five-week modified moving average of $23.08. The stock is above its 200-week simple moving average of $19.22 as the "reversion to the mean". This average was last tested during the week of Jan. 13, 2017, when it was $16.07. The 12x3x3 weekly slow stochastic reading is projected to end the week slipping to 17.77, falling below the oversold threshold of 20.00. When 2018 began, the stock set its 2018 high with the stochastic reading above 90.00 as an "inflating parabolic bubble" providing a huge warning.

Trading Strategy: Buy weakness to my monthly value level of $20.20 and reduce holdings on strength to my quarterly risky level at $32.52. My annual and semiannual pivots are $22.52 and $22.85, respectively.

Lennar (LEN)

Weekly Chart For Lennar

Courtesy of MetaStock Xenith

The weekly chart for Lennar is negative but oversold with the stock below its five-week modified moving average of $47.10. The stock broke below its 200-week simple moving average or its "reversion to the mean" during the week of Sept. 28 after holding it since the week of June 29. The 12x3x3 weekly slow stochastic reading is projected to slip to 12.99 this week, down from 17.21 on Oct. 12 becoming more oversold below the 20.00 threshold. When 2018 began, the stock set its all-time high with the stochastic reading above 90.00 as an "inflating parabolic bubble" providing a huge warning.

Trading Strategy: Buy weakness to my monthly value level of $41.78 and reduce holdings on strength to my semiannual and quarterly risky levels of $58.84 and $61.69, respectively. My annual risky level at $70.88 was the level at which to reduce holdings in January.

PulteGroup (PHM)

Weekl Chart For PulteGroup

Courtesy of MetaStock Xenith

PulteGroup has a negative but oversold weekly chart with the stock below its five-week modified moving average of $25.11. The stock broke below its 200-week simple moving average or "reversion to the mean" at $23.13 this week. The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 6.84, down from 8.00 on Oct. 12. When 2018 began, the stock set its 2018 high with the stochastic reading above 90.00 as an "inflating parabolic bubble" providing a huge warning. Today, the stochastic reading implies that the stock is "too cheap to ignore".

Trading Strategy: If you want to start a position in home builders, your choice should be PulteGroup with the stock below its 200-week SMA of $23.13 and below my monthly pivot at $24.37. Reduce holdings on strength to my semiannual, annual, and quarterly risky levels of $27.08, $29.23 and $32.14, respectively. The last opportunity to reduce holdings at $29.23 occurred during the week of Aug. 25.

Toll Brothers (TOL)

Weekly Chart For Toll Brothers

Courtesy of MetaStock Xenith

Toll Brothers has a negative but oversold weekly chart with the stock below its five-week modified moving average of $333.60. The stock broke below its 200-week simple moving average or its "reversion to the mean" at 36.05 during the week of Sept. 28. The 12x3x3 weekly slow stochastic reading is projected to decline to 15.44 this week, down from 20.13 on Oct. 12, falling below the oversold threshold of 20.00. The warning suffered by Toll was a weekly "key reversal" on Jan. 26. This occurred as the stock set its 2018 high, then closed below the low of the week of Jan. 19.

Trading Strategy: Buy weakness to my monthly value level of $29.70 and reduce holdings on strength to my semiannual, quarterly, and annual risky levels at $35.36, $46.23, and $48.60, respectively. The last opportunity to reduce holdings to $48.60 occurred during the week of March 2.

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.