Is It Time to Sell Homebuilder Stocks?

NEW YORK (TheStreet) -- Homebuilder stocks have traded lower over the last four weeks for 11 of the 12 homebuilders profiled today.

These stocks will likely rally today after KB Home (KBH) reported earlier today fiscal first-quarter earnings of 12 cents a share, topping analysts' estimates by 4 cents.

Shares of KB Home were recently trading at $19.33, up 9%. The weekly chart for this homebuilder will be negative unless Friday's close is above its five-week modified moving average at $18.40, which means that the stock needs to sustain its gains.

In my opinion, strength in the homebuilder stocks is an opportunity to book profits at the risky levels shown in today's 'Crunching the Numbers" table for the 19 components of the PHLX Housing Sector Index (^HGX). My reason is that recent data for market for new homes show that this segment of the housing market has stalled.

The National Association on Home Builders Housing Market Index picked up a point to 47 in March after plunging by a record 10 points to 46 in February. The index remains below the neutral reading of 50. The NAHB continues to blame bad weather, the difficulty in finding lots and labor, and the rising cost of materials.

The NAHB tracks its housing index vs. single-family starts, which came in at an annual rate of 583,000 in February and has now been below the important 600,000 threshold for two consecutive months, and well below the potential of 1 million to 1.2 million unit range. 

On March 10, I wrote, Five Years from the Bottom: Keep an Eye on Housing and Banks and explained how the homebuilders provided stock market warnings as early as mid-2005. Without a vibrant housing market, it's hard to be bullish on stocks or the U.S. economy as home construction is a driver of job growth on Main Street.

I question the notion that owning a home has become more affordable. I live in Tampa, and in this area of the country, only 65% of households own their homes, the lowest since the housing bubble popped. An article in last Sunday's Tampa Bay Times indicated that the inflation-adjusted median family income fell 8.4% from the end of 2007 to the end of 2012. This is not the favorable financial environment for increased demand for home buying.

I have been tracking the weekly chart for the housing sector index which has 19 components including 11 of the 12 homebuilders that I track. Beazer Homes (BZH) is not in this housing index. The other eight components provide products and services that support the housing market, and those companies have been outperforming the homebuilders.

Courtesy of MetaStock / XENITH

The weekly chart for the housing index shows the Fibonacci retracements of the decline from its mid-2005 high to the March 2009 low. On Tuesday, this index closed at 203.55, down 2% from its Feb. 21 close at 207.70, just above the 61.8% retracement level at 202.05. The relative strength of the non-homebuilders components has offset the poorer performances among the 11 homebuilders in this index.

The weekly chart profile shifts to negative with a close on Friday below its five-week modified moving average at 203.72 as the 12x3x3 weekly slow stochastic is projected to be declining at 77.75 below the overbought reading of 80.00. The downside risk is to the 200-week simple moving average at 138.99.

The message from the Federal Reserve's statement later today and comments from Fed Chief Janet Yellen at her first press conference this afternoon should influence the volatility among these stocks.

Here are the profiles based upon how we crunch the numbers. This should help you decide when to invest. Take a look at my chart following for more quantitative analysis on these stocks.

Beazer Homes ($20.57 vs. $21.49 on Feb. 21, down 4.3%) has a negative weekly chart given a close this week below its five-week MMA at $21.51. A semiannual value level is $17.69 with a monthly risky level at $23.46.

D.R. Horton (DHI) ($22.45 vs. $23.65 on Feb. 21, down 5.1%) has a negative weekly chart given a close this week below its five-week MMA at $22.75. A semiannual value is $21.42 with a weekly risky level at $24.55.

Hovnanian (HOV) ($4.93 vs. $5.88 on Feb. 21, down 16.2%) has a negative weekly chart given a close this week below its five-week MMA at $5.44. It broke below its 200-day SMA at $5.49 on March 5 and is also below its semiannual pivot at $5.13.

KB Home ($17.68 vs. $19.00 on Feb. 21, down 6.9%) has a negative weekly chart given a close this week below its five-week MMA at $18.40. This month's value level is $16.97 with a weekly risky level at $19.54.

Lennar (LEN) ($40.60 vs. $41.85 on Feb. 21, down 3%) has a negative weekly chart given a close this week below its five-week MMA at $40.66. This month's value level is $39.49 with a semiannual risky level at $41.07.

MDC Holdings (MDC) ($29.38 vs. $29.51 on Feb. 21, down 0.4%) has a negative weekly chart given a close this week below its five-week MMA at $29.63. Monthly and semiannual value levels at $28.47 and $28.38 have been tested with its 200-day SMA a resistance at $30.45.

M/I Homes (MHO) ($23.40 vs. $23.80 on Feb. 21, down 1.7%) has a negative weekly chart given a close this week below its five-week MMA at $23.64. The stock tested its 200-day SMA at $22.19 last week and has a semiannual risky level at $23.43 which was tested on Tuesday.

Meritage Homes (MTH)($43.54 vs $47.26 on Feb. 21, down 7.9%) has a negative weekly chart given a close this week below its five-week MMA at $45.45. A semiannual value level is $40.30 with a semiannual risky level at $46.19.

PulteGroup (PHM) ($19.48 vs. $20.37 on Feb. 21, down 4.4%) has a negative weekly chart given a close this week below its five-week MMA at $19.77. This month's value level is $18.27 with a weekly risky level at $20.41.

Ryland Group (RYL) ($41.40 vs. $43.05 on Feb. 21, down 3.8%) has a negative weekly chart given a close this week below its five-week MMA at $42.59. The stock has tested its 200-day SMA at $40.38 in each of the last four trading days. A semiannual value level is $36.78 with a monthly risky level at $43.62.

Standard & Pacific (SPF)($8.79 vs. $8.57 on Feb. 21, up 2.6%) will have a negative weekly chart given a close this week below its five-week MMA at $8.71. A monthly value level is $8.43 with a semiannual risky level at $8.89 tested on Tuesday.

Toll Brothers (TOL) ($36.53 vs. $38.19 on Feb. 21, down 4.3%) has a negative weekly chart given a close this week below its five-week MMA at $37.09. A semiannual value level is $35.68 with a monthly risky level at $37.29.

Armstrong World (AWI) ($56.52 vs. $59.27 on Feb. 21, down 4.6%), the designer of floors, ceilings and cabinets, will have a negative weekly chart given a close this week below its five-week MMA at $56.79. The stock tested its 200-day SMA at $53.21 on Feb. 24 and March 3. A semiannual value level is $55.63 with a monthly risky level is $59.61.

Fidelity National Title Group (FNF) ($31.80 vs. $33.22 on Feb. 21, down 4.3%), the title insurance company, will have a negative weekly chart given a close this week below its five-week MMA at $31.94. A semiannual value level is $28.73 with a weekly risky level at $32.38.

Lennox International (LII) ($92.95 vs $89.44 on Feb. 21, up 3.9%), the air conditioning and heating company, has a positive but overbought weekly chart with its five-week MMA at $90.13. Its all-time intraday high at $94.69 was set on March 7. A weekly value level is $91.18 with a monthly risky level at $98.03.

Masco (MAS) ($23.17 vs. $22.44 on Feb. 21, up 3.3), the home-improvement and building-products company, has a positive weekly chart with its five-week MMA at $22.95. A weekly value level is $22.74 with a monthly risky level at $23.82.

Owens Corning (OC) ($43.63 vs. $44.97 on Feb. 21, down 3%), the provider of insulation, roofing and siding, will have a negative weekly chart given a close this week below its five-week MMA at $42.95. A monthly value level is $41.01 with a semiannual risky level at $43.96. The stock set its 2014 intraday high at $46.64 on March 4.

Radian Group (RDN) ($15.65 vs $15.40 on Feb. 21, up 1.6%), the provider of private mortgage insurance, will have a negative weekly chart given a close this week below its five-week MMA at $15.37 after setting a multiyear intraday high at $16.24 on March 5. A weekly value level is $15.22 with a quarterly risky level at $16.01.

Vulcan Materials (VMC)($67.40 vs. $65.73 on Feb. 21, up 2.5%), the concrete and cement company, has a positive but overbought weekly chart with its five-week MMA at $65.31 with a multiyear intraday high at $69.50 set on March 4. A monthly value level is $65.75 with an annual risky level at $68.53.

Weyerhaeuser (WY)($29.61 vs. $30.18 on Feb. 21, down 1.9%), the timber and forest-products company, has a negative weekly chart with its five-week MMA at $29.96. A weekly value level is $28.94 with a monthly risky level at $30.49.

Crunching the Numbers with Richard Suttmeier

Today's table shows the gains and losses for 12 homebuilders and eight companies that provide products and services to the housing market. Note that eight of the 12 homebuilders have declined since the end of January as shown in Red in the % Change column.

In the column labeled Last 12-Month Return, I show the percent gain or loss over the last 12 months. In today's table, the only loser over the last 12 months is homebuilder MDC Holdings (MDC), down 20.4%.

There are five columns with moving average titles: Five-Week Modified Moving Average, 21-Day Simple Moving Average, 50-Day Simple Moving Average, 200-Day Simple Moving Average and the 200-Week Simple Moving Average.

The column labeled 12x3x3 Weekly Slow Stochastics shows the pattern on each weekly chart with readings from Oversold, Rising, Overbought, Declining or Flat.

Interpretations: (stocks below a moving average listed in Red are below that moving average)

Five-Week Modified Moving Average (MMA) is one of two indicators that define whether or not a weekly chart profile is positive, neutral or negative. The other is the status of the 12x3x3 weekly slow stochastic.

A stock with a positive technical rating is above its five-week MMA with rising or overbought stochastics.

A stock with a negative technical rating is below its five-week MMA with declining or oversold stochastics.

A stock with a neutral technical rating has profile that is not positive or negative.

The 200-Week Simple Moving Average (SMA) is considered a long-term technical support or resistance and as a "reversion to the mean" over a rolling three to five year horizon. (even Apple declined to its 200-week SMA in June 2013)

The 21-Day Simple Moving Average is a short-term technical support or resistance used by many hedge fund traders to adjust positions. A stock above its 21-day SMA will likely move higher over a rolling three to five day horizon and vice versa.

The 50-Day Simple Moving Average is also a technical support or resistance used by many strategists and commentators in financial TV.

The 200-Day Simple Moving Average is another technical support or resistance and I consider this level as a shorter-term "reversion to the mean" over a rolling six to 12 month horizon. (even Apple tested or crossed its 200-day SMA in nine of the last 10 years)

Value Levels, Pivots and Risky Levels are calculated based upon the last nine weekly closes (W), nine monthly closes (M), nine quarterly closes (Q), nine semiannual closes (S) and nine annual closes (A). I have one column for pivots, which is a magnet for the period shown. The columns to the left of the pivots are first and second value levels. The columns to the right of the pivots are first and second risky levels.

Investors who wish to buy a stock should use a good-until-canceled GTC limit order to buy weakness to a value level. Investors who want to sell a stock should use a GTC limit order to sell strength to a risky level.

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

Follow @Suttmeier

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

Richard Suttmeier is the chief market strategist at ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

More from Opinion

3 New Investing Myths That Must Be Busted

3 New Investing Myths That Must Be Busted

Why a Global Stock Market Crash Is Coming

Why a Global Stock Market Crash Is Coming

Sears CEO Eddie Lampert Looks Like He Is Sucking Company Dry

Sears CEO Eddie Lampert Looks Like He Is Sucking Company Dry

Nasdaq Exec: Exchange Is 'All-In' on Using Blockchain Technology

Nasdaq Exec: Exchange Is 'All-In' on Using Blockchain Technology

It's Dumb to Think Legalizing Weed Is Still a Political Issue

It's Dumb to Think Legalizing Weed Is Still a Political Issue