Homebuilder sentiment is strong. Single-family-housing starts are rising. Home prices remain elevated.
The weekly charts for Lennar and KB Home will be positive given closes this week above their five-week modified moving averages at $57.52 and $34.48, respectively.
That strength will be an opportunity to reduce holdings, as the positive housing data may not be as strong as they appear.
Lennar closed Friday at $56.47, in bull-market territory 51% above its Dec. 26, 2018, low of $37.29. The stock is also in bear territory, 21% below its all-time intraday high of $71.87, set Jan. 19, 2016.
The Miami homebuilder is expected to report earnings of $1.90 a share when it reports before the open on Jan. 8.
KB Home closed Friday at $34.91 and in bull-market territory, having a bit more than doubled from its Nov. 15, 2018, low of $16.82.
The stock is also in bear territory, 59% below its all-time intraday high of $85.45, set in July 2005. The Los Angeles builder is estimated to have earned $1.30 a share. It reports after the close on Jan. 9.
Recent housing data have been positive.
The National Association of Home Builders Housing Market Index rose five points to 76 in December, well above the neutral reading of 50.
Single-family-housing starts increased 2.4% in November to a seasonally adjusted 938,000 units.
The NAHB opined that “market conditions for single family homes are positive, given the lack of resale inventory, low interest rates and a solid job market.”
This graph is not as bullish as it seems! Note that at the mid-2006 high for single-family sales, 1.8 million units sold were well above the sentiment reading of just above 70.
Today’s reading for sales is almost half its potential given the near record reading for sentiment. That’s the widest gap between the two measures since the data series began in January 1985.
The S&P CoreLogic Case-Shiller Index for October continued to show that home prices are on the rise.
The 20-City Composite showed a year-over-year gain of 2.2%.
The chart shows that home prices peaked in July 2006, then declined 35% to a cycle low in March 2012. Since then the home-price bubble reinflated by 63%. This reading is 5.8% above the July 2006 high.
This questions home affordability! Household incomes did not match this rise since March 2012 and household debt rose to record levels through the third quarter of 2019.
The hottest markets are Phoenix, with a year-over-year gain of 5.8%, and Tampa, Fla., and Charlotte, N.C., with gains of 4.9% and 4.8%, respectively.
The Weekly Chart for Lennar
Courtesy of Refinitiv XENITH
The weekly chart for Lennar ended last week negative with the stock below its five-week modified moving average of $57.52.
The stock is above its 200-week simple moving average, or reversion to the mean, at $50.57. That was a magnet between the weeks of Feb. 22 and Aug. 23.
The 12x3x3 weekly slow stochastic reading fell to 39.8 last week from 50.67 on Dec. 27.
At the October high of $62.63 this reading was above 90 and in an inflating parabolic bubble formation. Since then the stock is down 9.8%.
Lennar stock is above its above its monthly and semiannual value levels at $55.39 and $53, respectively, with its annual risky level above the chart at $75.17. Its quarterly value level is $39.48.
Trading Strategy: Buy weakness to Lennar's monthly and semiannual value levels at $55.39 and $53 but employ a stop-loss on a weekly close below its five-week modified moving average at $57.52. This would indicate risk to its quarterly value level at $39.48.
The Weekly Chart for KB Home
Courtesy of Refinitiv XENITH
The weekly chart for KB Home ended last week neutral with the stock above its five-week modified moving average of $34.48.
The stock is above its 200-week simple moving average, or reversion to the mean, at $23.28. That was a magnet between the weeks of Oct. 26, 2018, and Feb. 1, 2019, when the average was $19.67.
The 12x3x3 weekly slow stochastic reading fell to 49.34 last week from 54.65 on Dec. 27.
At the October high of $37.40 this reading was above 90 and in an inflating parabolic bubble formation. Since then the stock is down 6.6%.
KB Home stock is well above its quarterly value level at $23.86, with a monthly pivot at $35.87 and annual and semiannual risky levels at $37.36 and $38.24, respectively.
Trading Strategy: Sell strength to its annual and semiannual risky levels at $37.36 and $38.24. Buy weakness to its quarterly value level at $23.86.
How to use my value levels and risky levels:
The closes on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the past nine closes in these time horizons.
New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.
A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.
A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.