How to Trade Homebuilder Stocks as Single-Family Home Starts Slip

Homebuilders D.R. Horton, KB Home, Lennar, PulteGroup and Toll Brothers have mixed performance records, as the market for new homes remains below potential. Here's how to trade these stocks.
By Richard Suttmeier ,

The market for new single-family homes continues to lag its potential, according to the latest data for homebuilder sentiment for November and housing starts for October. Here's how to trade five homebuilder stocks based on technical analysis charts.

D.R. Horton (DHI) - Get Report continues to be the best performing homebuilder, followed by Lennar (LEN) - Get Report and Toll Brothers (TOL) - Get Report , but Toll is in correction territory. PulteGroup (PHM) - Get Report is also in correction territory and is a year-to-date loser. KBHome (KBH) - Get Report is the laggard and is in bear market territory.

Each homebuilder has its own story, based upon the category of homes it builds and the communities in which it builds.

Given their differing share price volatility, these stocks have not been suitable long-term investments. But they can be trading vehicles for investors using good-till-canceled limit orders. Use GTC limit orders to buy on weakness to a key technical level below the market or to sell on strength to a key technical level above the market.

The National Association of Home Builders' latest Housing Market Index had a reading of 62 in November, slipping three points from an upwardly revised reading of 64 in October. This index measures the sentiment in the market for the construction of single-family homes. The HMI has been above 60 for the last six months. The October reading is the highest since the tail-end of the housing boom in late-2005.

The graph below shows the NAHB Housing Market Index vs. single-family starts. The HMI (in blue with its scale on the left of the graph) shows the three-point drop to 62 in November. Single-family starts (in red with its scale on the right of the graph) shows the data for September. The October reading will be in this graph next month.

Housing starts fell 11% in October to a seasonally adjusted 1.06 million units. The important component for homebuilders is single-family production, which declined 2.4% to 722,000 units, down from 740,000 in August. Single-family starts remain well below the normal annual rate of 1.1 million to 1.2 million units.

Here's the weekly chart for D.R. Horton.


Courtesy of MetaStock Xenith

D.R. Horton had a close of $31.87 on Wednesday, up 8.5% so far in the fourth quarter and up 26% year to date.

The weekly chart will shift to positive if the stock ends the week on Nov. 20 above its key weekly moving average of $30.51. The stock has been above its 200-week simple moving average since the week of Dec. 9, 2011, when the average was $11.36. Today the average is $22.44. 

The momentum reading is projected to rise to 51.11 this week, up from 49.60 on Nov. 13. Momentum scales from 00.00 to 100.00, with a reading below 20.00 oversold and a reading above 80.00 overbought. A rising reading above 20.0 is positive, while a declining reading below 80.00 is negative. This study is shown in red along the bottom of the chart.

Investors looking to buy D.R. Horton should place a good till canceled limit order to buy the stock if it falls to $29.50, which is a key level on technical charts until the end of November.

A key level until the end of 2015 at $31.44 should continue to be a magnet.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $37.38, which is a key level on technical charts until the end of 2015.

Here's the weekly chart for KB Home.


Courtesy of MetaStock Xenith

KB Home had a close of $13.45 on Wednesday, down 0.7% so far in the fourth quarter and down 18.7% year to date. It is in bear market territory -- 25.7% below Nov. 24, 2014, high of $18.10.

The weekly chart is negative but oversold, with the stock below its key weekly moving average of $13.73. The stock has been below its 200-week simple moving average since the week of Aug. 21, with the average now at $15.63. The momentum reading is projected to decline to 17.77 this week, down from 18.87 on Nov. 13 -- becoming more oversold.

Investors looking to buy KB Home should place a good till canceled limit order to buy the stock if it falls to $12.73, which is a key level on technical charts until the end of this week

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $14.15 and $15.35, which are key levels on technical charts until the end of 2015 and the end of November, respectively.

Here's the weekly chart for Lennar.


Courtesy of MetaStock Xenith

Lennar had a close of $50.55 on Wednesday, up 5% so far in the fourth quarter and up 12.8% year to date.

The weekly chart will shift to positive if the stock ends the week on Nov. 20 above its key weekly moving average of $50.08 -- if the weekly momentum reading is rising. The stock has been above its 200-week simple moving average since the week of Oct. 14, 2011, when the average was $14.43. Today the average is $39.51. The momentum reading is projected to slide to 37.91 this week, down from 39.56 on Nov. 13.

Investors looking to buy Lennar should place a good till canceled limit order to buy the stock if it falls to $49.23 and $47.88, which are key levels on technical charts until the end of November and the end of this week, respectively.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $54.36, which is a key level on technical charts until the end of 2015.

Here's the weekly chart for PulteGroup.


Courtesy of MetaStock Xenith

PulteGroup had a close of $18.97 on Wednesday, up 0.5% so far in the fourth quarter and down 11.6% year to date. It is in correction territory -- 18.8% below its 2015 high of $23.36, set on Feb. 24.

The weekly chart will shift to positive if the stock ends the week on Nov. 20 above its key weekly moving average of $18.83, if the weekly momentum reading is rising. The stock has held its 200-week simple moving average of $17.79 for the last five weeks. The momentum reading is projected to slide to 19.57 this week, down from 19.61 on Nov. 13, becoming more oversold.

Investors looking to buy PulteGroup should place a good till canceled limit order to buy the stock if it falls to $16.95, which is a key level on technical charts until the end of November.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $23.27, which is a key level on technical charts until the end of 2015.

Here's the weekly chart for Toll Brothers.


Courtesy of MetaStock Xenith

Toll Brothers had a close of $36.95 on Wednesday, up 7.9% so far in the fourth quarter and up 7.8% year to date. But it is in correction territory, 12.4% below its 2015 high of $42.19, set on Aug. 19.

The weekly chart will shift to positive if the stock ends the week on Nov. 20 above its key weekly moving average of $36.21. The stock nearly tested its 200-week simple moving average of $33.57 last week. The stock has been above its 200-week simple moving average since the week of Dec. 30, 2011.

Investors looking to buy Toll Brothers should place a good till canceled limit order to buy the stock if it falls to $35.31 and $34.93, which are key levels on technical charts until the end of November and the end of this week, respectively.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $38.96, which is a key level on technical charts until the end of 2015.

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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