Homebuilders Are Rolling Over

NEW YORK (TheStreet) -- Recent housing data for the market in new single-family homes has been mildly positive, but without help from the Federal Reserve a continued rally for homebuilder stocks will be difficult.

On July 24, Goldman Sachs came out with a bullish call on housing, arguing that new construction for single-family homes would gather momentum over the next several years. Goldman upgraded its outlook for U.S. homebuilders to attractive from neutral.

While I cannot disagree with this call long-term, I believe their timing is off for the start of a significant improvement in homebuilding and that homebuilders have reached a plateau 75% below their peak in activity in 2005 and 2006.

The day after Goldman's call, we learned that sales of newly built, single-family homes declined by 8.4% to a seasonally adjusted annual rate of 350,000 units in June. The inventory of new homes remains near a record low at 144,000 units, a very slim 4.9-month supply. The builders would like to add new inventory, but it is still difficult to charm community banks into issuing enough new construction and development loans to jumpstart supply.

The Fed statement following the Federal Open Market Committee meeting on Aug. 1 stated that the U.S. economy decelerated in the first half of 2012 and had slow growth in employment and an elevated unemployment rate.

One thing I always look for in a Fed statement is what the FOMC has to say about the housing market. The FOMC described the housing sector as improving but still depressed. But again, the Fed did not offer a solution for lifting this important segment of the U.S. economy.

Before this new information came out, I wrote Homebuilder Stocks: Don't Chase the Mojo on July 19, the day after the PHLX Housing Sector Index ( HGX) set its year to date high at 141.29. Yesterday, this index closed at 130.45, down 7.7% from that high.

Source: Thomson Reuters

The weekly chart for PHLX Housing Sector Index (130.45) still shows rising momentum (12x3x3 weekly slow stochastic). If HGX ends the week below its five-week modified moving average at 132.93, the weekly chart profile shifts to neutral from positive. This would indicate that the rally for the index has failed below its 38.2% Fibonacci Retracement of the entire downtrend from the July 2005 high to the March 2009 low. This retracement is the red line just above the recent peak. My annual value level is 122.53 with a quarterly pivot at 135.17 and my new monthly risky level at 152.09.

Source: Thomson Reuters

The daily chart for HGX is negative, with the index below its 21-day simple moving average at 137.02 and just above its 50-day at 129.62. Given a close below the 50-day level, the risk is to the 200-day at 116.81.

The table above shows data from ValueEngine.com and my value levels, pivots and risky levels. Use the value levels, pivots and risky levels for your "buy and trade" strategies.

D R Horton ( DHI) ($17.63) -- My annual value level is $14.45 with a quarterly pivot at $16.79 with a monthly risky level at $19.79.

Lennar Corp. ( LEN) ($28.97) -- My semiannual value level is $23.97 with a quarterly pivot at $28.89 and monthly risky level at $34.05.

MDC Holdings ( MDC) ($31.77) -- My quarterly value level is $24.94 with an annual pivot at $32.81 and monthly risky level at $35.71.

Meritage Homes ( MTH) ($34.57) -- My semiannual value level is $29.82 with a quarterly pivot at $33.00 and monthly risky level at $36.60.

Pulte Group ( PHM) ($11.04) -- My semiannual value level is $8.35 with an annual pivot at $11.37 and monthly risky level at $12.54.

Ryland Group ( RYL) ($23.43) -- My quarterly value level is $20.68 with a monthly risky level at $27.09.

Standard & Pacific ( SPF) ($5.62) -- My semiannual value level is $4.26 with a quarterly pivot at $5.15 and monthly risky level at $6.47.

Toll Brothers ( TOL) ($28.97) -- My semiannual value level is $24.20 with an annual pivot at $29.30 and monthly risky level at $31.92.

I advocate the use of GTC Limit Orders to add to long positions or become less short on share price weakness to the value levels. Traders should enter GTC Limit Orders to reduce long positions or to add to a short position on strength to risky levels.

At the time of publication, the author had no positions in any of the stocks mentioned and no other conflicts.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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