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Will Homebuilders Q4 Support Additional Share Price Strength?

NEW YORK ( TheStreet) -- The housing market has been a bright spot for the U.S. economy over the past several quarters. This week we will learn whether or not Q4 earnings from four homebuilders are strong enough to support additional share price strength.

Pre-market this morning Dow component Caterpillar (CAT) ($95.58) reported that they earned $1.04 per share after an 87 cents a share charge against improper accounting relative to operations of a new unit in China. CAT thus beat the $1.68 EPS estimate.

CAT is well below its February 2012 high at $116.95 and is well above its July 2012 low at $78.25. The daily chart shows an overbought condition and the weekly chart is positive with the five-week modified moving average at $92.06. The stock has a buy rating with a quarterly value level at $92.77 with an annual pivot at $96.43 (tested pre-market) and annual risky level at $97.63 which was tested last week.

My benchmark for the homebuilder industry is the PHLX Housing Sector Index (HGX). The weekly chart for HGX (191.35) shows an overbought condition with the five-week MMA at 177.24. HGX is up 11.7% year to date and up 159.8% since its October 2011 low. The horizontal red lines shown on the chart are called Fibonacci retracement levels of the decline from the July 2005 high to the March 2009 low. The 38.2% retracement is support at 145.52 with the 61.8% retracement a resistance at 202.09. HGX is above the 50% retracement at 173.81.

Chart Courtesy of Thomson/Reuters

At we show that 61.7% of all stocks are overvalued, and as I explained Friday in Market Hasn't Peaked a reading of 65% and higher is a warning for the stock market. The construction sector begins the week at 24.5% overvalued, which raises the bar for earnings presented in my analysis today.

Here's what we know about the housing market : The National Association of Home Builders Housing Market Index stalled at 47 in January after increasing for the prior eight months, and that 47 is below the neutral 50 reading. Single family housing starts climbed 8.1% in December to an annual rate of 616,000, and a sustained trend above 600,000 is important. On Friday we learned that new single family home sales declined 7.3% in December to an annual rate of 369,000 units and that inventory, while still low, rose to 151,000. For 2012 new home sales rose 19.9% with the price of a new home up 13.9% to $248,900.

I am concerned that home prices are rising too fast and that the current sales pace is about a third of the number at the housing market peak. In my opinion the rally in the homebuilder stocks has been overrunning the improved housing data. The HGX should be closer to the 38.2% retracement level, not the 61.8% number.

Reporting premarket Tuesday D R Horton (DHI - Get Report) ($21.76 vs. $21.00 Jan. 17) still has a buy rating with its Sept. 21 high at $22.79. The daily chart is overbought with a positive weekly chart positive and its five-week MMA at $20.60. DHI is 31.2% overvalued with a trailing 12 months price-to-earnings ratio at 27.1. My quarterly value level is $18.86 with a semiannual pivot at $20.50 and monthly risky level at $21.92.
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