Spike In Sentiment, Housing Starts Positive for Homebuilders

Homebuilder confidence rose in Nov to 70, the highest since March and knocking on the door of the 2005 all-time high.

D. R. Horton (DHI) set its all-time intraday high of $48.38 this morning. KB Home (KBH) remains in bear market territory versus its July 2005 high of $85.45. Lennar (LEN) is in correction territory since its July 2005 high of $59.32. Pulte Group (PHM) and Toll Brothers (TOL) are in bear market territory versus their July 2005 all-time intraday highs of $31.67 and $46.63, respectively.

All five homebuilders are solidly in bull market territory since their post-election lows, as they all set multiyear highs in November.

On Nov. 16, the National Association of Home Builders reported that their Housing Market Index rose two points in November to 70. This measure of housing sentiment peaked at 71 in March versus its June 2005 high of 72.

On Nov. 17, the Census Bureau reported that single-family housing starts, the NAHB benchmark, rose by 5.35% in October to a seasonally-adjusted annual pace of 877,000 units. This is up 8.4% year over year.

Monthly Graph of the NAHB HMI vs Single-Family Housing Starts

Courtesy of the National Association of Home Builders

The NAHB HMI at 70 in November 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 reading is for September. Note that the HMI is leading the rise in starts by a significant margin, which should be considered a warning. When the index was 72 in June 2005, single-family starts were approaching 1.8 million units, not struggling at about half that pace.

Despite strong numbers, the NAHB says that homebuilders face supple-side constraints, such as lot and labor shortages and rising materials prices.

The NAHB wants Congress to focus on tax reform that supports and encourages home ownership. Eliminating or reducing the deduction for mortgage interest payments is an issue, but only 21% of homeowners use the mortgage interest rate deduction.

The latest reading for the S&P CoreLogic Case-Shiller 20-City Home Price Index shows a rise of 5.9% year over year in August. The index appears as a re-inflated bubble as it’s up 51.3% since bottoming in March 2012, and is just 1.8% below its all-time high set in July 2006.

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.

Homebuilder stocks are extremely overvalued. Back in mid-2005 they had high single-digit P/E ratios. Today the P/E ratios are between 17.51 and 20.45.

D R Horton (DHI)

Courtesy of MetaStock Xenith

D R Horton ($48.13 on Nov. 17) has a positive but overbought weekly chart with the stock above its five-week modified moving average of $43.31, and above its 200-week simple moving average of $28.94, considered the “reversion to the mean” last tested during the week of Feb. 12, 2016 when the average was $23.31. The 12x3x3 weekly slow stochastic reading ended last week at 94.60 up from 94.25 on Nov. 10 well above the overbought threshold of 80.00, and above 90.00 as an “inflating parabolic bubble”.

Trading Strategy: Buy weakness to my semiannual value level of $41.37. Reduce holdings on strength to my weekly risky level of $50.37.

KB Home (KBH)

Courtesy of MetaStock Xenith

KB Home ($28.91 on Nov. 17) has a positive but overbought weekly chart with the stock above its five-week modified moving average of $26.52, and above its 200-week simple moving average of $16.68, considered the “reversion to the mean” last tested during the week of Feb. 10, 2017 when the average was $15.97. The 12x3x3 weekly slow stochastic reading ended last week at 87.77 up from 84.31 on Nov. 10 well above the overbought threshold of 80.00.

Trading Strategy: Buy weakness to my quarterly value level of $23.30. Reduce holdings on strength to my weekly risky level of $33.36.

Lennar (LEN)

Courtesy of MetaStock Xenith

Lennar ($58.89 on Nov. 17) has a positive weekly chart with the stock above its five-week modified moving average of $55.68, and above its 200-week simple moving average of $45.74, considered the “reversion to the mean” last tested during the week of Jan. 6, 2017 when the average was $42.42. The 12x3x3 weekly slow stochastic reading ended last week at 78.33 up from 76.78 on Nov. 10 approaching the overbought threshold of 80.00.

Trading Strategy: Buy weakness to my quarterly value level of $48.53. Reduce holdings on strength to my weekly risky level of $62.94. My semiannual and annual pivots are $58.23 and $58.97, respectively.

PulteGroup (PHM)

Courtesy of MetaStock Xenith

PulteGroup ($32.25 on Nov. 17) has a positive but overbought with the stock above its five-week modified moving average of $29.31. The stock is above its 200-week simple moving average of $20.63, which is the “reversion to the mean” last tested during the week of Jan. 27, 2017 when the average was $19.36. The 12x3x3 weekly slow stochastic reading ended last week at 94.37 up from 93.44 on Nov. 10 moving further above the overbought threshold of 80.00. The readings above 90.00 is the indication of an “inflating parabolic bubble”.

Trading Strategy: Buy weakness to my semiannual value level of $26.81. Reduce holdings on strength to my weekly risky level of $33.16.

Toll Brothers (TOL)

Courtesy of MetaStock Xenith

Toll Brothers ($47.00 on Nov. 17) has a positive but overbought with the stock above its five-week modified moving average of $43.98. The stock is above its 200-week simple moving average of $34.43, which is the “reversion to the mean” last tested during the week of Feb. 24, 2017 when the average was $33.33. The 12x3x3 weekly slow stochastic reading ended last week at 88.20 slipping from 88.75 on Nov. 10 both readings above the overbought threshold of 80.00.

Trading Strategy: Buy weakness to my semiannual value level of $38.47. Reduce holdings on strength to my weekly risky level of $49.19.

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