Pulte Group (PHM) - Get PulteGroup, Inc. Report stock was gaining at midday, after it reported weaker-than-expected earnings before the opening bell Tuesday morning and slipped by about 2% premarket, but opened pretty much unchanged. The homebuilder continues to believe that the housing market will benefit from an improving economy and job creation.
D.R. Horton (DHI) - Get D.R. Horton, Inc. Reportreports earnings before the opening bell Wednesday and analysts expect this homebuilder to earn 75 cents a share. These earnings reports are key measures for the health of the housing market, given weakening homebuilder sentiment and single-family starts well below potential.
D.R. Horton and Pulte ended Monday with year-to-date gains of 33.8% and 33.4%, respectively, and both are in bull market territory up 37% and 38%, respectively, vs. their Nov. 9 post-election lows. These are impressive short-term performance numbers but keep in mind that D.R. Horton is 16.6% below its July 2005 high of $42.82 and Pulte is 49.4% below its July 2005 high of $48.22.
On July 18, the National Association of Home Builders reported that their Housing Market Index slipped two points in July to 64. This measure of housing sentiment peaked at 71 in March vs. its all-time high of 72, set in June 2005.
On July 19, the Census Bureau reported that single-family housing starts, the NAHB benchmark, rose by 6.3% in June to a seasonally adjusted annual pace of 849,000 units.
Monthly Graph of the NAHB HMI vs. Single-Family Housing Starts
Courtesy of the National Association of Home Builders
The NAHB HMI at 64 in July is shown in blue with the scale at the left side of the graph. Single-family housing starts are shown in red on the right side of the graph. This reading is 799,000 for May, which is the level in today's graph. Note that the HMI is leading the rise in starts by a significant margin, which should be considered a warning. When the index was 72 in June 2005, single-family starts were approaching 1.8 million units, not struggling at more than half that pace.
The NAHB says that homebuilders are increasingly concerned over rising building costs, notably lumber. Homebuilders remain optimistic that consumer interest in new homes will remain strong. Keeping an optimistic view, they note that single-family starts are at their second highest pace this year.
When looking at the weekly charts below, keep an eye on the 200-week simple moving averages shown in green. Investors should consider this level as the "reversion to the mean." The "reversion to the mean" is an investment theory that the price of a stock will eventually return to a longer-term mean and the 200-week simple moving averages tracks this concept. A ticker trading above its "reversion to the mean" will eventually decline back to it on weakness. Similarly, a ticker trading below its "reversion to the mean" will eventually rebound to it on strength.
D.R. Horton (DHI)
Courtesy of MetaStock Xenith
D.R. Horton ($36.56 on July 24) has a positive but overbought weekly chart with the stock above its five-week modified moving average of $35.32, and above its 200-week simple moving average of $27.33, considered the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to end this week at 81.87, moving above the overbought threshold of 80.00.
Trading strategy: Buy weakness to my semiannual value level of $30.48. My quarterly and annual pivots are $35.55 and $35.04, respectively. Reduce holdings on strength to weekly risky levels of $36.94 and $37.69.
Courtesy of MetaStock Xenith
PulteGroup ($24.42 on July 24) will be downgraded to a negative weekly chart given a close on Friday below its five-week modified moving average of $24.14. The stock is above its 200-week simple moving average of $19.89, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to slip to 79.33 this week falling below the overbought threshold of 80.00.
Trading strategy: Buy weakness to my quarterly and annual value levels of $21.17 and $19.83, respectively. Reduce holdings on strength to my monthly risky level of $25.57.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.