You can huff and puff and blow the homebuilders down, but your home is your castle. Even if homes decline in value, it's not the bursting of a bubble.
In my judgment, there is not a housing bubble. But I
see a potential bubble in housing stocks. My models indicate that the homebuilders aren't likely to revisit their July highs again for quite some time.
profiled the homebuilders in mid-June, indicating that while I was not projecting a housing bubble, the homebuilders faced some headwinds. The homebuilders were the hottest momentum trade, and the monthly chart profiles were parabolic, which is the condition that precedes all bubbles.
Wednesday, new-home sales came in strong, at a record seasonally adjusted annual rate of 1.4 million. However, median home prices were down 4% year over year.
added to the picture Thursday morning, reporting earnings that indicate demand for new homes continues to be robust.
Toll's third-quarter net income more than doubled to $215.5 million, or $1.27 a share, which was well above the consensus estimates, and the company forecast 20% income growth in both 2006 and 2007.
Company executives played down the possibility of a housing bubble, citing strong job growth and an improving economy as positives for the housing industry, particularly for luxury homes, which is Toll's niche.
The momentum continued from mid-June for the homebuilders. Some headed to new all-time highs on July 20. Others reached new heights on July 28.
, the play on Florida land, peaked first on July 11. Back in mid-June, weekly chart patterns were positive, but now they are negative, and
is a case in point.
The chart confirms a significant top, showing weekly closes below its five-week modified moving average, now at $86.62, with its 12x3 weekly slow stochastic declining below 80 on a scale of zero to 100. That's a negative profile, and suggests additional downside risk.
Note that in June, Pulte shares were
the five-week MMA, with a rising stochastic reading indicating that the parabolic shown on the monthly chart was likely to continue.
Highs Goeth Before a Fall
Most homebuilders are trading lower today than they did in mid-June, but each reached a new all-time high in July. Note that St. Joe peaked first on July 7, which is not surprising: Shares were 42.2% overvalued. That overvaluation made it the best short candidate in the group, particularly on strength, which the positive weekly chart profile on June 17 suggested would come in the near term.
That turned out to be an accurate indication.
published a positive story on St. Joe the same week I published my review of the homebuilders. The
piece noted St. Joe's 800,000 acres of land in inventory in Florida, and stated that Florida is one of the fastest-growing states both in population and economically.
At that time, I warned that despite these great demographics, my model showed St. Joe 42.2% overvalued, with fair value at $56.51 vs. the June 17 close at $80.35. The weekly chart profile for St. Joe showed an overbought 12x3 weekly slow stochastic. St. Joe's July 11 high of $85.25 approached my monthly risky level at $86.91 at that time. Now shares are struggling to return to the level at which
was positive on the company.
All of the homebuilders were overvalued on June 17, but now they are slightly undervalued. The primary reason for this is the fact that Wall Street analysts have raised their 12-month forward EPS estimates for the homebuilders, and these data entered my model to raise the stocks' fair value price levels.
The first sign that a bubble for the homebuilders is breaking is the fact that my models indicate that the July highs for these companies should remain the highs for the remainder of the year and into 2006. The correction since the July highs reached lows on Tuesday in reaction to the weaker-than-expected existing-home sales data. Stability over the last two days resulted from the record new-home sales and positive earnings from Toll Brothers.
But Thursday, it was difficult for those gains to be maintained. Given the good news of the past two days, closes Friday below all of the five-week MMAs shown in the table above would keep the weekly chart profiles negative, putting the focus on the supports. At Tuesday's low,
and Toll Brothers both tested supports: Semiannual support is $58.27 for Lennar and $48.26 for Toll.
Supports and Pivots
A value level is a price at which buying should occur on weakness. A risky level is a price at which selling should occur on strength. A pivot is a value or risky level that was violated and has a high probability of being tested again in its time horizon as a magnet. Strength should be limited to the pivots, which are below the July highs, a warning sign. Closes below all value levels will be the next sign that the bubble is popping.
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.