Reduce Holdings on Lennar and 4 Other Homebuilders as Housing Data Weakens

Homebuilders, D.R. Horton (DHI - Get Report) , KB Home (KBH - Get Report) Lennar (LEN - Get Report) , Pulte Group (PHM - Get Report) and Toll Brothers (TOL - Get Report) bottomed on election day and are up by significant bull-market percentages since then. All five set their multiyear intraday highs on June 14 anticipating rising homebuilder sentiment and increasing housing starts. That did not happen!

On June 15, the National Association of Home Builders reported that their Housing Market Index slipped two points in June to 67. This measure of housing sentiment peaked at 71 in March vs. its all-time high of 72 set in June 2005.

On June 15, the Census Bureau reported that single-family housing starts, the NAHB benchmark, slipped 3.9% in May to a seasonally adjusted annual pace of 794,000 units.

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NAHB HMI vs. Single-Family Housing Starts
NAHB HMI vs. Single-Family Housing Starts

Courtesy of the National Association of Home Builders

The NAHB HMI at 67 in June is shown in blue with the scale at the left side of the graph. Single-family housing starts is in red and is shown on the right side of the graph. This is the unrevised reading of 835,000 units for April. The revised number for April is 826,000 units. Note that the HMI is leading the rise in starts by a significant margin, which is a warning. When the index was 72 in June 2005, single-family starts were approaching 1.8 million units, now struggling at half that pace.

Homebuilders expect continued strengthening of the housing market in a gradual recovery. However, they remain worried about labor-shortages and reduced availability of suitable lots.

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Homebuilders Scorecard
Homebuilders Scorecard

All five homebuilders are solidly in a post-election bull market with gains between 26.1% and 52.6% from their post-election lows to their June 16 closes. Each set multiyear intraday highs on June 14.

Looking back to July 2005, the five homebuilders are deep in bear market territory 21.4% to 74.7% below these all-time intraday highs. The performance differences shown in the scorecard reflect reactions to stock-specific news such as earnings reports. Lennar will report earnings on Tuesday and KB Home will report on June 27. Toll Brothers reported better-than-expected earnings on May 23, which was a catalyst for strength into June 14.

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)
D.R. Horton (DHI)

Courtesy of MetaStock Xenith

D. R. Horton ($33.65 on June 16) is in bull market territory 26.1% above its Nov. 9 low of $26.69, and set its multiyear intraday high of $34.94 on June 14. The stock is 21.4% below its July 2005 peak of $42.82.

The weekly chart is neutral with the stock above its five-week modified moving average of $33.33, and above its 200-week simple moving average of $26.83, considered the "reversion to the mean."

The 12x3x3 slow stochastic reading ended last week at 63.94, slipping from 64.05 on June 9. Buy weakness to my monthly value level of $31.44. My quarterly and semiannual pivots are $32.54 and $33.33, respectively. Sell strength to my annual risky level of $35.04, which was nearly tested at the June 14 high of $34.94.

KB Home (KBH)
KB Home (KBH)

Courtesy of MetaStock Xenith

KB Home ($21.63 on June 16) is in bull market territory, 52.6% above its Nov. 8 low of $14.17, and set its multiyear intraday high of $22.33 on June 14. The stock is 74.7% below its July 2005 peak of $85.45.

The weekly chart is positive but overbought with the stock above its five-week modified moving average of $21.02 and above its 200-week simple moving average of $15.92, which is the "reversion to the mean."

The 12x3x3 slow stochastic reading ended last week at 88.96 well above the overbought threshold of 80.00. Buy weakness to my monthly, semiannual and annual value levels of $20.05, $17.29 and $14.93, respectively. Sell strength to my weekly risky level of $22.07, which was tested at the June 14 peak.

Lennar (LEN)
Lennar (LEN)

Courtesy of MetaStock Xenith

Lennar ($52.93 on June 16) is in bull market territory, 33.4% above its Nov. 9 low of $39.68, and set its multiyear intraday high of $54.84 on June 14. The stock is 23.1% below its July 2005 peak of $68.86.

The weekly chart is positive, above its five-week modified moving average of $51.72, and above its 200-week simple moving average of $44.48, which is the "reversion to the mean."

The 12x3x3 slow stochastic reading ended last week at 68.12, up from 65.96 on June 9. Buy weakness to my semiannual and quarterly value levels of $48.95 and $43.79, respectively. My monthly pivot is $52.08. Sell strength my annual risky level of $59.99.

PulteGroup (PHM)
PulteGroup (PHM)

Courtesy of MetaStock Xenith

PulteGroup ($24.01 on June 16) is in bull market territory 35.7% above its Nov. 9 low of $17.69, and set its multiyear intraday high of $24.73 on June 14. The stock is 50.2% below its July 2005 peak of $48.22.

The weekly chart is positive with the stock above its five-week modified moving average of $23.29, and above its 200-week simple moving average of $19.64, which is the "reversion to the mean."

The 12x3x3 slow stochastic reading ended last week at 63.87, up from 58.86 on June 9. Buy weakness to my monthly, semiannual and annual value levels of $22.40, $20.77 and $19.83, respectively. Sell strength to my semiannual risky level of $28.18.

Toll Brothers (TOL)
Toll Brothers (TOL)

Courtesy of MetaStock Xenith

Toll Brothers ($38.54 on June 16) is in bull market territory, 44.6% above its Nov. 9 low of $26.65, and set its multiyear intraday high of $39.40 on June 14. The stock is 34.3% below its July 2005 peak of $58.67.

The weekly chart is neutral with the stock above its five-week modified moving average of $37.37 and above its 200-week simple moving average of $33.57, which is the "reversion to the mean."

The 12x3x3 slow stochastic reading ended last week at 75.93 down from 77.08 on June 9. Buy weakness to my annual pivot of $35.71. Sell strength to my weekly risky level of $39.70.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.