Here's Why Now Is a Good Time to Book Profits on Homebuilder Stocks - TheStreet

NEW YORK (TheStreet) -- Strength from homebuilder stocks following this week's improving housing data gives investors an opportunity to book gains of 19% to 33% from levels in October. The trading ranges may widen with some higher highs, but the housing data weren't strong enough to sustain technical breakouts for these stocks.

Here are  the current trading ranges.

D.R. Horton (DHI) - Get Report ($25.30) rebounded by 33% from its Oct. 13 low of $19.29 to $25.59 on Thursday, crossing above its 200-day simple moving average of $22.54, with its May 15, 2013 high at $27.74. This stock is up 13% year to date.

KB Home (KBH) - Get Report ($17.36) rebounded by 28% from its Oct. 13 low of $13.75 to $17.66 on Thursday, crossing above its 200-day SMA of $17.01, with its July 2 high at $18.98. This stock is down 4.5% year to date

Lennar (LEN) - Get Report ($46.97) rebounded by 26% from its Oct.13 low of $37.50 to a multiyear intraday high at $47.20 on Thursday, crossing above its 200-day SMA of $40.33. This stock is up 19% year to date.

PulteGroup (PHM) - Get Report ($21.36) rebounded 30% from its Oct. 13 low of $16.56 to $21.48 on Nov.19, crossing above its 200-day SMA of $19.18, with its Feb. 26 high at $21.65. The stock is up 4.9% year to date.

Ryland Group (RYL) ($38.37) rebounded 28% from its Oct. 13 low of $30.33 to $38.71 on Wednesday, crossing above its 200-day SMA of $37.89, with its July 1 high at $40.35. The stock is down 12% year to date.

Toll Brothers (TOL) - Get Report ($34.21) rebounded 19% from its Oct. 13 low of $28.92 to $34.49 on Thursday, which was still below its 200-day SMA of $34.77, with its Sept. 2 high at $35.94. This stock is down 7.5% year to date.

This week's news on the housing market was not as robust as the positive moves for the homebuilder stocks.

The National Association of Home Builders has stated that housing affordability slipped in the third quarter. Assuming that the U.S. median family income is $63,900, 61.8% of new and existing homes were sold to families earning $63,900 in the third quarter, down from 62.6% in the second quarter. The median home price rose 3.3% to $221,000 in the third quarter from $214,000 with the average 30-Year fixed rate mortgage down to 4.35% from 4.44%.

Homebuilder confidence rose by four points in November to 58. The NAHB cited improving consumer confidence. The Housing Market Index has been above the neutral 50 reading for five consecutive months, and the NAHB expects momentum will continue into 2015.

The important statistic from the housing starts data are single-family starts, which rose 4.2% in October to an annual rate of 696,000 units. Single-family permits increased 1.4% to 640,000 units. The graph below shows the NAHB HMI (blue line) rise of four points to 58 in November, while single family starts (red line) is not updated to the annual rate of 696,000 in Oct. Single family starts remain well below the normal rate of 1.1 million to 1.2 million units.

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Let's look at the weekly chart for the PHLX Housing Index which has 19 components including the six homebuilders covered in this post. 10 components are homebuilders while nine are companies that support the housing industry.

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Courtesy of MetaStock Xenith

The busting of the housing bubble began with the housing index in July 2005. The index crashed 82% to its March 2009 low. The breakout above the 200-week SMA (green line) in January 2012 triggered strength to the top horizontal dashed line in May 2013.

This line is called the 61.8% Fibonacci retracement of the decline from the July 2005 high to the March 2009 low. The trading range since May 2013 has been primarily between the 50% retracement at 173.80 and the 61.8% retracement at 202.05, with a low at 164.03 in August 2013 and a high of 213.81, which is being approached again this week.

At the time of publication, the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff

TheStreet Ratings team rates D R HORTON INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate D R HORTON INC (DHI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

You can view the full analysis from the report here: DHI Ratings Report