Lennar

D.R. Horton  (DHI - Get Report) , KB Home (KBH - Get Report) , Lennar  (LEN - Get Report) , PulteGroup (PHM - Get Report) and Toll Brothers  (TOL - Get Report) are the major homebuilder stocks to profile. The NAHB Housing Market Index remains well above the neutral level of 50.00. Lower mortgage rates should provide a positive backdrop for the market for single-family homes. Single-family housing starts remain well below potential despite the slowdown in the rise in home prices.

Here are trading strategies for these homebuilders using daily charts as the weekly charts show these stocks positive but overbought. My conclusion is that you can trade homebuilder stocks but they aren't long-term investments.

The NAHB Housing Market Index

The National Association of Home Builders announced April 16 that its Housing Market Index for April rose a point to 63. This reading has been above 60 for the past three months. The NAHB sees renewed demand for single-family homes, but there are challenges including home affordability, a shortage of construction workers and buildable properties. Positives include lower mortgage rates.

On April 22, the U.S. Census Bureau and the Department on Housing and Urban Development released housing starts for March. Single-family starts declined to an annual rate of 785,000 down from 788,000 in February.

Monthly Graph of the NAHB HMI vs Single-Family Housing Starts

Courtesy of the National Association of Home Builders

The blue line is the Housing Market Index and the red line is Single-Family Starts delayed by one month. Single-family starts peaked at 1.8 million in mid-2005,  just as homebuilder stocks peaked. Note that in a robust housing market starts are higher on the graph than the index. The market for single-family starts is thus a drag on the U.S. economy.

On April 24, we learned that according to the Census Bureau, New Home Sales rose 4.5% in March. Single-family homes were at a seasonally adjusted 692,000 in March vs 662,000 in February. This data series peaked at about 1.3 million in mid-2005. This is more evidence that housing is a drag on the economy.

Scorecard for the Five Homebuilders

The Daily Chart for D. R. Horton

Courtesy of Refinitiv XENITH

D. R. Horton has been above a "golden cross" since April 4 when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. The stock set its all-time intraday high of $47.02 on April 24 on a positive reaction to earnings that day. The stock was above its annual pivot at $45.79 then gapped below it the next day. The close of $34.66 on Dec. 31 was input into my proprietary analytics and its semiannual and annual pivots at $44.52 and $45.79, respectively. The close of $41.38 on March 29 was an input and its quarterly risky level is above the chart at $48.91. The close of $44.53 on April 30 was an input and the value level for May is $34.90.

Trading Strategy: Buy weakness to the 200-day simple moving average at $40.10 and reduce holdings on strength to the annual and quarterly risky levels at $45.79 and $48.91, respectively. A semiannual pivot remains at $44.52.

The Daily Chart for KB Home

 

Courtesy of Refinitiv XENITH

KB Home has been above a "golden cross" since April 5 when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. The stock set its 2019 intraday high of $26.53 on April 24. The stock was above its semiannual pivot at $23.74 since April 2. The close of $19.10 on Dec. 31 was input into my proprietary analytics and its annual value level remains at $21.10 which held on Feb. 7 and its semiannual pivot at $23.74. The close of $24.17 on March 29 was an input and its quarterly risky level is above the chart at $30.58. The close of $25.91 on April 30 was an input and the value level for May is $20.55.

Trading Strategy: Buy weakness to the semiannual pivot at $23.74 and reduce holdings on strength to the quarterly risky level at $30.58.

The Daily Chart for Lennar

Courtesy of Refinitiv XENITH

Lennar has been above a "golden cross" since March 29 when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. The stock set its 2019 intraday high of $53.41 on May 1. The stock is nestled between its semiannual pivot at $52.00 and its quarterly pivot at $52.57. The close of $39.15 on Dec. 31 was input into my proprietary analytics and its semiannual pivot is $52.00 and annual risky level is $64.25. The close of $49.09 on March 29 was an input and its quarterly pivot is $52.47. The close of $52.03 on April 30 was an input and the value level for May is $41.69.

Trading Strategy: Buy weakness to the 200-day simple moving average at $47.12 and reduce holdings on strength to the annual risky level at $64.25. Semiannual and quarterly pivots are $52.00 and $52.57, respectively.

The Daily Chart for PulteGroup

 

Courtesy of Refinitiv XENITH

Pulte has been above a "golden cross" since March 12 when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. The stock set its 2019 intraday high of $32.02 on May 2. The stock has been failing at its quarterly pivot at $32.01 so far in May. The close of $25.99 on Dec. 31 was input into my proprietary analytics and its semiannual value is $26.17 with an annual risky level is $34.20. The close of $27.96 on March 29 was an input and its quarterly risky level is $32.01. The close of $31.46 on April 30 was an input and the value level for May is $27.06.

Trading Strategy: Buy weakness to the monthly and semiannual value levels at $27.06 and $26.17, respectively, and reduce holdings on strength to the annual risky level at $34.20. The quarterly pivot is $32.01.

The Daily Chart for Toll Brothers

Courtesy of Refinitiv XENITH

Toll Brothers has been above a "golden cross" since March 5 when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. The stock set its 2019 intraday high of $39.46 on April 18. The stock's semiannual pivot at $36.79 has been a magnet since Jan. 31. The close of $32.93 on Dec. 31 was input into my proprietary analytics and its semiannual pivot is $36.79 with an annual risky level is $48.16. The close of $36.20 on March 29 was an input and its quarterly risky level is $41.13. The close of $38.10 on April 30 was an input and the value level for May is $34.33.

Trading Strategy: Buy weakness to the semiannual pivot at $36.79 and its monthly value level of $34.33 and reduce holdings on strength to the quarterly and annual risky levels at $41.13 and $48.16, respectively.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March. 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.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.