Homebuilder Stocks Have Been Stabilizing Despite Weak Data

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

Despite weakening homebuilder sentiment and sliding single-family starts, homebuilder stocks are stabilizing.

D. R. Horton, KB Home, Lennar, PulteGroup and Toll Brothers set tradeable lows in October and November.

Despite stability, the trade for these stocks is called a bear market rally.

Homebuilders are fundamentally cheap with P/E ratios between 6.71 and 8.65.

Here Are Key Housing Market Data

On Dec. 17, the National Association of Home Builders announced that its Housing Market Index for December fell by four points to 56 versus the neutral reading of 50. This is the lowest reading since May 2015. The NAHB is concerned that buyers are balking due to rising home costs. This is reflected in the buyer traffic component, which fell to 43, well below the neutral 50.

On Dec. 19, the Census Bureau reported that single-family housing starts decreased to 824,000 in November, down from 865,000 in October. The NAHB indicates that builders are reluctant to add to inventories given the affordability concerns.

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

NAHB Homebuilder Sentiment

Courtesy of the National Association of Home Builders

The NAHB HMI at 56 in December 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 October. When the index was 72 in June 2005, single-family starts were approaching 1.8 million units, now struggling at less than half that pace.

Here's A Scorecard for Five Major Homebuilders

Scorecard For 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 will be positive if the stock ends the week above its five-week modified moving average at $36.67. The stock has been stabilizing around its 200-week simple moving average or the "reversion to the mean" now at $34.68 since the week of Oct. 26. The 12x3x3 weekly slow stochastic reading is projected to end this week rising to 29.73, up from 27.50 on Dec. 14. As 2018 began, this reading was 93.67 as an "inflating parabolic bubble". The bubble popped, and the stock remains in bear market territory 32.4% below its 2018 high of $53.32 set on Jan. 4.

Trading Strategy: With a P/E ratio of 8.65 according to Macrotrends, buy weakness to the 200-week SMA at $34.68 and reduce holdings on strength to my semiannual and annual risky levels of $44.56 and $45.45, respectively. My monthly pivot is $37.97.

KB Home (NYSE:KBH)

Weekly Chart For KB Home

Courtesy of MetaStock Xenith

The weekly chart for KB Home will be positive if the stock ends this week above its five-week modified moving average at $20.42. The stock has been stabilizing around its 200-week SMA or "reversion to the mean" at $19.49 since the week of Oct. 26. The 12x3x3 weekly slow stochastic reading is projected to rise to 34.17 this week up from 32.70 on Dec. 14. When 2018 began, the stochastic reading was 94.13, above 90.00 as an "inflating parabolic bubble". The bubble popped, and the stock remains in bear market territory 48.6% below its 2018 high of $38.80 set on Jan. 11.

Trading Strategy: With a P/E ratio of 7.22 buy weakness to the 200-week SMA and monthly value level of $19.49 and $19.29, respectively, and reduce holdings on strength to my annual and semiannual pivots at $22.52 and $22.85, respectively.

Lennar (NYSE:LEN)

Weekly Chart For Lennar

Courtesy of MetaStock Xenith

The weekly chart for Lennar becomes positive given a close this week above its five-week modified moving average of $42.46. The stock has been below its 200-week SMA or "reversion to the mean" at $49.42 last tested during the week of Sept. 28. The 12x3x3 weekly slow stochastic reading is projected to end the week rising to 25.57 this week, up from 24.65 on Dec. 14. When the stock set its 2018 high of $72.07 on Jan. 18 the stochastic reading was above 90.00 at 94.05 as an "inflating parabolic bubble". The bubble popped, and the stock remains in bear market territory 43.1% below the high.

Trading Strategy: With a P/E ratio of 7.44, buy the stock on a weekly close above $42.51 and reduce holdings on strength to my monthly, semiannual and quarterly risky levels of $57.99, $58.84 and $61.69, respectively.

PulteGroup (NYSE:PHM)

Weekly Chart For PultrGroup

Courtesy of MetaStock Xenith

PulteGroup has a positive weekly chart with the stock above its five-week modified moving average of $2573. The stock moved back above its 200-week SMA or "reversion to the mean" at $23.29 during the week of Oct. 26. The 12x3x3 weekly slow stochastic reading is projected to rise to 71.83 this week, up from 65.35 on Dec. 14. When the stock set its 2018 high of $35.21 during the week of Jan. 23, the reading was 91.42, above 90.00 as an "inflating parabolic bubble". The bubble popped, and the stock remains in bear market territory 24.8% below its 2018 high of $35.21 set on Jan. 23.

Trading Strategy: With a P/E ratio of 7.68, buy weakness to my monthly value level and the 200-week SMA at $25.66 and $23.29, respectively, and reduce holdings on strength to my semiannual and annual risky levels of $27.08 and $29.23, respectively.

Toll Brothers (NYSE:TOL)

Weekly Chart For Toll Brothers

Courtesy of MetaStock Xenith

Toll Brothers has a positive weekly chart with the stock above its five-week modified moving average of $32.66. The stock has been below its 200-week SMA or "reversion to the mean" at $35.92 since the week of Oct. 5. The 12x3x3 weekly slow stochastic reading is projected to rise to 47.74 this week, up from 41.25 on Dec. 14. The warning suffered by Toll as 2018 began 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. The stock remains in bear market territory 38.7% below the Jan. 23 high of $52.73.

Trading Strategy: With a P/E ratio of 6.71, buy weakness to my monthly value level of $28.47 and reduce holdings on strength to my semiannual, quarterly and annual risky levels at $35.36, $46.23 and $48.60, 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.