NEW YORK (TheStreet) -- Readings related to the housing market have been mixed over the last month or so. This makes the chart patterns and earnings from homebuilders Hovnanian (HOV) and Toll Brothers (TOL) the latest news on housing. These homebuilders have had significant share price volatility in 2014 and both report quarterly earnings before the opening bell on Wednesday.
Here's how to trade Hovnanian and Toll Brothers.
Hovnanian ($3.90) did not have a great 2014 trading down 55% from as high as $6.80 on Jan. 3 to $3.06 into Oct.14. The stock then surged 44% trading up to as high as $4.42 into Nov. 25. The high was a failed test of the 200-day simple moving average at $4.37. The weekly chart shifts to positive given a close this week above a key moving average at $4.02.
Investors in Hovnanian should book profits by entering a "good 'til canceled" limit order to sell strength to a key technical level at $4.68.
Investors looking to buy Hovnanian on weakness enter a "good 'til canceled" limit order to buy weakness to a key technical level at $3.10.
Toll Brothers ($34.60) also had a tough 2014 trading down 28% from as high as $39.95 on March 4 to as low as $28.92 into Oct.13. The stock then surged 23% trading to as high as $35.48 into Nov. 24. The stock closed Monday just below its 200-day SMA at $34.63. The weekly chart shifts to positive given a close this week above its 200-week SMA average at $34.11.
Investors in Toll Brothers should book profits by entering a "good 'til canceled" limit order to sell strength to key technical levels at $35.70 and $42.75.
Investors looking to buy Toll Brothers on weakness enter a "good 'til canceled" limit order to buy weakness to a key technical level at $29.00.
Here's some of the latest statistics for the housing market.
The September reading for the S&P / Case-Shiller 20-City Home Price Composite showed a year-over-year gain of just 4.9% down from 5.5% in August. This deceleration includes a sequential decline of 0.1%. Home prices remain elevated which adversely affects affordability. From the cycle low set in March 2012 low the price of an average home is up 29%. A normal long-term uptrend for home prices is about 8.5% for the last 2.5 years.
The most recent reading on the Conference Board's reading on consumer confidence was weaker than expected coming in at 88.7 in October versus 94.1 in September. Remember that the neutral range is 90 to 110.
The latest reading on new home sales was below expectations at a seasonally-adjusted annual rate of 458,000 units in October below analysts forecasts of 472,000. Homebuilders may be building too many homes on speculation.
One issue is the housing market is the tax treatment of a short-sale, which occurs when the bank servicing an underwater mortgage agrees for forgive the difference between the lower sale price of the home vs. what's owed on the mortgage.
Between the end of 2008 and the end of 2013 the dollars forgiven in a short-sale was not a taxable event. Now it is taxable income, but relief is in sight. Last week the House passed the Tax Increase Prevention Act of 2014 and the Senate is expected to pass the bill this week. The problem is that this bill will expire on Dec. 31, so if passed and signed into law before Congress recesses on Nov.11, only home sellers who used a short-sale in 2014 would be helped. Many who considered a short-sale in 2014 probably did not to avoid a tax on phantom income.
On Monday, the Federal Housing Finance Agency released new mortgage guidelines whereby Fannie Mae and Freddie will enable creditworthy borrowers to get a mortgage with a 3% down payment. These loans are for home buyers who can "afford a mortgage", but lack the cash to make a significant down payment plus closing costs. The FHFA says that they will monitor these loans on an on-going basis.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
TheStreet Ratings team rates HOVNANIAN ENTRPRS INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate HOVNANIAN ENTRPRS INC (HOV) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself, weak operating cash flow and poor profit margins."
You can view the full analysis from the report here: HOV Ratings Report