Homebuilder Stocks Lag as Industry Remains Below Potential

Homebuilder sentiment slipped a point in July while single-family housing starts rose modestly in June.
By Richard Suttmeier ,

Homebuilders DR Horton (DHI) - Get Report , KBHome (KBH) - Get Report and Pulte Group (PHM) - Get Report have positive but overbought weekly charts, while Lennar (LEN) - Get Report has a positive chart and Toll Brothers (TOL) - Get Report has a neutral weekly chart. Getting to this current status follows an 11-year volatile ride from bubble peaks, to the question of survival.

Let's take a look at history, then explain how to trade these stocks now.

Homebuilder stocks should not be considered long-term investments due to the extreme up and down share price volatility investors have experienced for more than 10 years. Volatility can be traded, however, and the weekly charts below feature the Fibonacci retracements from the housing bubble peaks set for each stock in July 2005 to stock-crash lows set between November 2008 and October 2011.

Before drilling down through the details, beware that two of these stocks are schedule to report second-quarter earnings before the opening bell on Thursday. DR Horton is expected to earn 66 cents a share and Pulte Group is expected to earn 33 cents a share.

The National Association of Home Builders Housing Market Index slipped a point to a reading of 59 in July. Sentiment readings have been steady for the last six months and the NAHB views this as continuing a gradual housing recovery. However, commentary from the association reflects softness in some markets due to regulatory issues, lot shortages and tightness in the labor market.

Single-family housing starts rose by a seasonally-adjusted annual rate of 778,000 units in June up from 764,000 units in May, which is the statistic showed in the graph below.

The graph above shows the NAHB Housing Market Index versus single-family starts. The HMI (in blue with its scale on the left of the graph) shows the reading to 59 in July. Single-family starts (in red with its scale on the right of the graph) shows the data for May, as this graph is produced before the release of the latest reading on housing starts.

Here's a scorecard for five major homebuilders followed by their weekly technical charts.

Here's the weekly chart for DR Horton.

Courtesy of MetaStock Xenith

The weekly chart for DR Horton positive but overbought with the stock above its key weekly moving average of $32.27 and above its 200-week simple moving average of $24.75. The weekly momentum reading is projected to rise to 80.04 this week up from 72.66 on July 15.

The horizontal lines are the Fibonacci retracements from the stock's bubble peak of $42.82 set in July 2005 to the low of $3.79 set in November 2008. The stock is 798.9% above the low and is above its 61.8% retracement of $27.91, but 20.4% below the bubble peak. The last buying opportunity occurred in February when the stock tested its 50% retracement of $23.31, which lined up with the 200-week simple moving average of $23.36 back then.

Investors looking to buy the stock should do so on weakness to $25.48, which is a key level on technical charts until the end of 2016.

There are pivotal levels of $31.09 for July, $32.36 for Sept. and $33.98 until the end of the year.

Investors looking to reduce holdings should consider selling strength to $36.83, which is a key level on technical charts until the end of 2016.

Here's the weekly chart for KB Home.

Courtesy of MetaStock Xenith

The weekly chart for KB Home is positive but overbought with the stock above its key weekly moving average of $15.26 and just above its 200-week simple moving average of $16.20. The weekly momentum reading is projected to rise to 88.76 this week up from 85.38 on July 15, becoming more overbought above the 80.00 threshold.

The horizontal lines are the Fibonacci retracements from the stock's bubble peak of $85.43 set in July 2005 to the low of $5.02 set in October 2011. The stock is 224.5% above the low and is a laggard longer-term well below its 23.6% retracement of $24.09. The stock is 80.9% Below its bubble peak.

Investors looking to buy the stock should consider doing so on weakness to $13.94 and $11.16, which are key levels on technical charts until the end of July and the end of September, respectively.

Investors looking to reduce holdings should consider selling strength to $23.15, which is a key level on technical charts until the end of 2016.

Here's the weekly chart for Lennar.

Courtesy of MetaStock Xenith

The weekly chart for Lennar is positive with the stock above its key weekly moving average of $47.22 and is above its 200-week simple moving average of $42.59. The weekly momentum reading is projected to rise to 72.29 this week up from 63.02 on July 15.

The horizontal lines are the Fibonacci retracements from the stock's bubble peak of $68.93 set in July 2005 to the low of $3.42 set in November 2008. The stock is 1322.5% above the low and is above its 61.8% retracement of $43.80. The stock is 29.4 below its bubble peak. The last buying opportunity occurred in January when the stock tested its 200-week simple moving average of $40.47 back then.

Investors looking to buy the stock should consider doing so on weakness to $44.49 and $42.30, which are key levels on technical charts until the end of 2016 and until the end of July, respectively.

Investors looking to reduce holdings should consider selling strength to $52.26 and $56.47, which are key level on technical charts until the end of September and the end of 2016, respectively.

Here's the weekly chart for Pulte.

Courtesy of MetaStock Xenith

The weekly chart for Pulte is positive but overbought with the stock above its key weekly moving average of $19.57 and above its 200-week simple moving average of $19.15. The weekly momentum reading is projected to rise to 83.56 this week up from 79.60 on July 15.

The horizontal lines are the Fibonacci retracements from the stock's bubble peak of $48.21 set in July 2005 to the low of $3.29 set in October 2011. The stock is 519.1% above the low and is testing its 38.2% retracement of $20.46. The stock has not been able to reach its 50% retracement of $25.75 making this homebuilder a laggard, and the stock is 57.7% below its bubble peak.

Investors looking to buy the stock should consider doing so on weakness to $18.92 and $18.44, which are key levels on technical charts until the end of September, and the end of 2016, respectively.

Investors looking to reduce holdings should consider selling strength to $28.43, which is a key level on technical charts until the end of 2016.

Here's the weekly chart for Toll Brothers.

Courtesy of MetaStock Xenith

The weekly chart for Toll Brothers is neutral with the stock just below its key weekly moving average of $27.72 and well below its 200-week simple moving average of $33.90. The weekly momentum reading is projected to rise to 45.47 this week up from 42.06 on July 15.

The horizontal lines are the Fibonacci retracements from the stock's bubble peak of $58.67 set in July 2005 to the low of $13.16 set in October 2011. The stock is 110.4% above the low and is between its 23.6% retracement of $23.93 and its 38.2% retracement of $30.57. The last buying opportunity occurred in February when the stock tested its 23.6% retracement of $23.93. The stock is 52.8% below its bubble peak.

Investors looking to buy the stock should consider doing so on weakness to $22.99, which is a key level on technical charts until the end of July.

Investors looking to reduce holdings should consider selling strength to $35.46, which is a key level on technical charts until the end of 2016.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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