Housing stocks have gone from momentum trades in June to value investments now.
All of the homebuilders that I have been tracking ended Monday below their 200-day simple moving averages, which was the risk I projected in my last article on the industry. All of their weekly chart profiles are negative, with the Florida real estate developer
showing oversold weekly slow stochastic readings below 20 on a scale of zero to 100. At their highs, all of these stocks were overbought with readings above 80.
When I first wrote about the homebuilders on June 17, I viewed the group as the hottest momentum trade in the market. However, I warned that the monthly chart profiles for the homebuilders had become parabolic, a condition that has preceded all bubbles, and on Aug. 26, I made the case that share prices for the housing stocks and St. Joe had in fact peaked in July.
All of the housing stocks I'm covering have declined 20% or more from their 52-week highs set in July, which makes now a good time to consider buying them for longer-term value. You want to buy these stocks when they are at least 20% undervalued, with an oversold weekly chart profile and on weakness to a value level.
The housing market appears to be on solid ground. Housing prices seem to have peaked, with only a modest pullback in prices in some parts of the country. Higher mortgage rates have not been cited as a factor in slowing sales. In fact,
reported Tuesday morning that fourth-quarter sales rose by 33% for the quarter ended Sept. 30 compared to the same quarter a year ago.
St. Joe has held a major support level, my semiannual pivot at $59.91, which it has been bouncing off of since Sept. 29. Stability for St. Joe could help the homebuilders, as I believe the company's shares exhibit leadership in the sector.
If St. Joe continues to have weekly closes above $59.91, the homebuilders should settle around current levels. If St. Joe drops below that level, it should weaken to $51.66 and the homebuilders are likely to test the value levels in the table below. Long-term investors who choose to buy now should also be prepared to add to positions at lower levels.
New monthly and quarterly value levels, pivots and risky levels are based upon the closes from Sept. 30.
Key to Valuations
I calculate a fair value for every stock, which is the price that a stock can trade at in a perfect world. Fair value is not a price target; it is based upon the stock's past data and projections for the future, including its trailing 12-month EPS, the forward 12-month estimated EPS, and the yield on the 30-year Treasury. How these data points are weighted is based on an analysis of the stock's price history, with some 17 other variables influencing the calculation based on its sector and industry group.
Weekly chart profile:
A stock with a positive profile has a weekly close above its five-week modified moving average with a rising 12x3 weekly slow stochastic, which is a measure of momentum on a scale of zero to 100. A stochastic reading below 20 is oversold, while a reading above 80 is overbought.
Value levels, risky levels and pivots:
A value level is a price at which buyers should emerge on share price weakness, while a risky level is a price at which sellers should reduce holdings on share price gains. A pivot is a value or risky level that was violated in its time horizon and acts as a magnet during the remainder of that time horizon. These levels are calculated in weekly (W), monthly (M), quarterly (Q), semiannual (S) and annual (A) time horizons, based upon the past nine closes in each time horizon. My theory is that the closes over a nine-year period are the summation of all bullish and bearish events for that market or specific stock.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.