Lennar Stock Looks Ready to Rally After Profit Report

Homebuilder Lennar is testing breakout territory. Here's how to trade it.
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Homebuilder Lennar  (LEN) - Get Report is cashing in on the migration to the suburbs.

Lennar yesterday reported strong second-quarter numbers, earning $1.65 a share excluding one-time items, while analysts on average had been estimating about $1.19. 

The Miami company pointed to homebuyers moving to less densely populated areas as one of the drivers of the better-than-expected numbers.

More important, the positive reinforcement that the shares are seeing post-earnings cements Lennar’s inclusion in an elite group of stocks in 2020: It’s up on the year.

It’s one of the 27% of S&P 500 components that’s actually in positive territory since the calendar flipped to 2020.

Lennar’s 15% year-to-date rally actually puts the stock in the top decile of S&P 500 components.

The fact that Lennar is working in this market environment might not seem particularly important right now. But in fact, as I have been emphasizing, owning what’s working matters.

A look back at prior crisis-investing environments over the past 3 1/2 decades shows that stocks that have positive six-month relative strength saw a 78.4% chance of a positive one-month forward return.

That’s about a 50% higher future win rate than the average S&P 500 stock.

The deck looks stacked in Lennar’s favor following its second-quarter-earnings results.

To figure out how to trade it from here, we’re turning to the chart.

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Lennar rebounded from the initial covid-19 crash in an extremely orderly uptrending channel, bouncing higher on each successive test of trendline support. 

That order amid chaotic market conditions is a good thing for investors trying to make sense of the price action here.

Resistance at $65 has acted as a sort of ceiling for the shares going back to the end of May. 

Coupled with uptrending support to the downside, Lennar is forming an ascending triangle pattern that triggers a buy signal on a material push through $65. 

Simply put, a breakout above that relative high-water mark means buyers are definitively back in control of the price action.

At the same time, relative strength, the indicator down at the bottom of the chart, has been in an uptrend of its own since Lennar’s price action bottomed. That indicates that this stock has been leading the rest of the market higher during the broad-based rally in stocks.

Risk management remains key in this market. The 50-day moving average has been acting like a decent proxy for trendline support, making it a logical place to park a protective stop if the trend reverses.

Meanwhile, Lennar looks primed for a breakout through $65. From there, the shares shouldn’t face much resistance at all-time highs just above $72.