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 focus on now. My call is to reduce holdings on these stocks as each is solidly in bull market territory vs. their fourth-quarter 2018 lows. Four of the five are in bear market territory from their July 2005 highs. This is evidence that the market for single-family homes has stalled.

The NAHB Housing Market Index

On June 17, the National Association of Home Builders announced that their Housing Market Index for June fell two points to 64. The NAHB claims that demand for single-family homes remain strong, but rising construction costs remain a concern. Affordability is an issue despite lower mortgage rates as incomes prevent first-time buyers from taking the homeowner plunge.

On June 18, the U.S. Census Bureau reported that single-family housing starts fell 6.4% in May to 820,000 units. The NAHB expects single-family starts to stay flat for the rest of 2019, which is a warning to heed.

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. Note that single-family starts peaked around 1.8 million in mid-2005, which is also when the 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.

In my opinion, homeowners are feeling the pinch of inflation in higher monthly mortgage payments. Even with a 30-year fixed rate mortgage, a head of household is making monthly payments 3% higher than a year ago. Why? Higher appraised values increase property taxes in some states. Home insurance rates rise every year. Remember that the deduction for state and local taxes and property taxes is limited to $10,000 by the new tax law.

Scorecard for the Five Homebuilders

The Weekly Chart for D. R. Horton

Courtesy of Refinitiv XENITH

The weekly chart for DHI is positive with the stock above its five-week modified moving average at $44.44. The stock is above its 200-week simple moving average or "reversion to the mean" at $36.48, which held as 2019 began. The annual risky level is $45.79, where positions should be reduced. The 12x3x3 weekly slow stochastic reading is projected to rise to 73.06 this week up from 71.07 on June 14.

The Weekly Chart for KB Home

Courtesy of Refinitiv XENITH

The weekly chart for KBH is negative, with the stock below its five-week modified moving average at $25.78. The stock is above its 200-week simple moving average or "reversion to the mean" at $20.60, which held as 2019 began. Its annual value level lines up with the 200-week at $21.10 as a level at which to buy the stock on weakness. The 12x3x3 weekly slow stochastic reading is projected to decline to 74.27, falling below the overbought threshold of 80.00.

The Weekly Chart for Lennar

Courtesy of Refinitiv XENITH

The weekly chart for LEN is positive, with the stock just above its five-week modified moving average at $51.96. The stock is above its 200-week simple moving average or "reversion to the mean" at $49.40, where it should be bought now. The upside is to its annual risky level at $64.25. The 12x3x3 weekly slow stochastic reading is projected to rise to 76.63 this week, up from 75.48 on June 14.

The Weekly Chart for PulteGroup

Courtesy of Refinitiv XENITH

The weekly chart for PHM is positive but overbought, with the stock above its five-week modified moving average at $31.68. The stock is above its 200-week simple moving average or "reversion to the mean" at $24.38, which held in the fourth quarter of 2018. The annual risky level is $34.20 where positions should be reduced. The 12x3x3 weekly slow stochastic reading is projected to remain overbought at 91.13, above 90.00 as an "inflating parabolic bubble."

The Weekly Chart for Toll Brothers

Courtesy of Refinitiv XENITH

The weekly chart for TOL is neutral, with the stock just below its five-week modified moving average at $37.22. The stock is above its 200-week simple moving average or "reversion to the mean" at $35.72, which is a key level to hold. The annual risky level is $48.16, where positions should be reduced. The 12x3x3 weekly slow stochastic reading is projected to rise to 53.80 this week, up from 50.71 on June 14.

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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 changed at the end of January, February, March, April and May. 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.

The close on June 28 is the second most important for 2019. This close is an input to my proprietary analytics and will generate new weekly, monthly, quarterly and semiannual levels.

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 last 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. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."

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