Lennar Shares Are a Falling Knife as Housing Market Has Stalled

Homebuilder sentiment is slipping. Single-family-housing starts remain elevated but most likely stalled in March. In this environment, Lennar shares are a falling knife.
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Lennar  (LEN) - Get Report beat its first-quarter earnings-per-share and revenue estimates, but also suspended its guidance due to the uncertainty created by the coronavirus pandemic. 

The stock opened lower today, stayed above its March 18 low of $25.42, then rebounded. The Miami homebuilder's shares have traded as high as $35.50, up 15%.

Lennar’s first quarter ended on Feb. 29, before the major market declines seen in March. In suspending guidance, the homebuilder is implying that foot traffic has stalled. The analysis of Lennar’s earnings is available on TheStreet.com via this link.

Homebuilder sentiment is slipping from elevated levels. Single-family-housing starts rose to 1.07 million units in February but most likely stalled in March.

Lennar closed Wednesday at $30.92, down 45% year to date and in bear-market territory 57% below its all-time intraday high of $71.87, set on Jan. 19, 2016. The stock is 22% above its March 18 low of $25.42.

Here’s the latest housing market data

The National Association of Home Builders Housing Market Index (in blue) fell two points to 72 in March, still well above the neutral reading of 50. 

Single-family-housing starts (in red) remain above a one-million-unit annual rate. 

The market for new homes has been hot due to low mortgage rates. This backdrop is fading fast as Covid-19 spreads around the country. 

That’s the theme from homebuilder Lennar. Mortgage rates are higher now and housing materials that are imported from China are in short supply.

HMI for March vs Single-Family Starts Foe January

HMI for March vs Single-Family Starts Foe January

This graph is not as bullish as it seems! Note that the mid-2006 high for single-family sales, 1.8 million units, was well above the sentiment reading of just above 70.

Today’s reading for sales remains well below 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 Daily Chart for Lennar

Daily Chart For Lennar

Daily Chart For Lennar

Courtesy of Refinitiv XENITH

The daily chart for Lennar clearly shows that the homebuilder has been in a free fall since it traded as high as $71.39 on Feb. 21. 

The stock had been above a golden cross, but this buy signal ended on March 11 when the 200-day simple moving average (in green) failed to hold. 

On the same day, the uptrend connecting the lows of Dec. 26, 2018, through the low of July 23, 2019, failed to hold.

Then a day later on March 12 the stock gapped below its semiannual value level at $53. This indicated risk to the quarterly value level at $39.48, which failed to hold on March 16. 

This pushed its p/e multiple from above 12 to 6, which is more typical for a homebuilder.

The Weekly Chart for Lennar

Weekly Chart For Lennar

Weekly Chart For Lennar

Refinitiv XENITH

The weekly chart for Lennar is negative, with the stock below its five-week modified moving average of $55.05. 

The stock is well below its 200-week simple moving average, or reversion to the mean, at $51.35. 

The 12x3x3 weekly slow stochastic reading is projected to fall to 47.71 this week from 59.05 on March 13.

In November this reading was above the 90 threshold on a scale of 0 to 100, putting the stock in an inflating parabolic bubble formation. 

This was a warning that the highs of January 2018 and February 2020 were a longer-term double top. 

Now Lennar is deep into bear-market territory.

Trading Strategy: I do not see a value level at which to catch this falling knife. The stock is far from being too cheap to ignore, but this week’s low of $25.42 can be a trading-range bottom given the cheap p/e multiple.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the February 28 closes.

New weekly levels are calculated after the end of each week.

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.