Homebuilder Volatility Provides Trading Opportunities

TheStreet.com

NEW YORK (TheStreet) -- The volatile price performances of the homebuilder stocks in 2013 have provided trading opportunities as an important segment of our economy attempts to return to leadership.

On Sept. 9 I wrote, Housing Bubble Is Re-inflating and included the fact that at the May 20 high for the PHLX Housing Sector Index (170.76) was up 22.6%. At that time the housing index was the best performing industry of those that I frequently profile. At the year to date low on Aug. 15, the housing index was down 4.2% on the year. At Wednesday's close the housing index has re-inflated to a year to date gain of 6.9%.

Chart Courtesy of Thomson/Reuters

The daily chart for the housing index shows declining momentum with the index trading around its 200-day SMA at 183.83 with the 21-day and 50-day SMAs as supports at 176.13 and 176.00. The index is between my semiannual and quarterly pivots at 180.52 and 185.61.

When the housing index was at its May 20 high most of the homebuilders had triple-digit gains over the last 12 months. Today only three have double-digit gains and five now show losses over the last 12 months.

In my Sept. 9 post I also showed that seven of 11 had hold ratings with two having sell ratings and two having strong sell ratings. All were trading below their 200-day SMAs. In addition, there was some upside potential given housing data suggesting a re-inflating bubble. Back at the May highs all were well above their 200-day SMAs, which indicated risk of reversion to the mean for all 11.

Between Sept. 6 and today's post all 11 homebuilders have rebounded with six up between a tradable 10.8% and 16.8% setting up profit-taking for buy-and-trade investors who took advantage of these trading opportunities.

Warnings include the fact that all seven of the homebuilders that had hold ratings on Sept. 9 now have sell ratings. In addition, nine of 11 are still below their 200-day SMAs and these levels may prove to be resistances.

Recent housing data has been reasonable but in my judgment not strong enough to be a driver of economic growth.

Last week we learned that the National Association of Home Builders (NAHB) Housing Market Index stalled in September at a reading at 58. While above the neutral 50, builders saw a pause in momentum given higher mortgage rates, tight credit for both builders and buyers, the lack of supply of desirable lots and rising labor costs.

Housing starts rose just 0.9% in August to an annual rate of 891,000 but single-family starts rose 7% to 628,000 vs. the 600,000 threshold that needs to be decisively cleared to have a strong housing market. As the graph above shows the gap between single-family starts and the housing market index remains large.

New home sales rose 7.9% in August to an annual rate of 421,000. This gain partially offsets the dip in July caused by the mortgage rate hike. Even so the NAHB describes this level of sales as only half way back to a normal market for newly built single-family homes.

The S&P / Case-Shiller Home Price Indices showed that their 20-City Composite rose by 1.8% sequentially in July and is up 12.4% year over year. This continues a deceleration of the rise in home prices. The 20-City index is down 22% from its June / July 2006 high and up 21.2% since the March 2012 low.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

Beazer Homes ($18.18 vs. $17.02 on Sept. 6) is above its 200-day SMA at $17.49 with a weekly value level at $17.20, a monthly pivot at $17.71 and monthly risky level at $19.65, which was tested at the Sept. 18.

DR Horton ($20.16 vs. $18.10 on Sept. 6) is between its 50-day and 200-day SMAs at $19.48 and $22.08. My annual value level is $16.05 with a weekly pivot at $19.00 and semiannual risky level at $21.19, which was tested at the Sept. 18.

Hovnanian ($5.27 vs. $5.04 on Sept. 6) is below its 50-day and 200-day SMAs at $5.31 and $5.72 and was the weakest performer between Sept. 6 and Wednesday's close. My monthly value level is $4.15 with a quarterly pivot at $5.47 and semiannual risky level at $5.77.

KB Home ($18.10 vs. $16.24 on Sept. 6) is between its 50-day and 200-day SMAs at $17.18 and $19.16, which was nearly tested on Sept. 19. My weekly value level is $16.52 with a quarterly pivot at $17.43 and semiannual risky level at $22.95.

Lennar ($36.39 vs. $32.25 on Sept. 6) is between its 50-day and 200-day SMAs at $33.71 and $38.23, which was nearly tested on Sept. 19. My weekly value level is $33.76 with a semiannual pivot at $35.45 and semiannual risky level at $40.29.

MDC Holdings ($30.65 vs. $27.65 on Sept. 6) is just above its 50-day SMA at $30.28 and stayed well below its 200-day SMA at $35.20. My semiannual value level is $28.44 and a monthly risky level at $31.89, which was exceeded at the Sept. 18 high.

M/I Homes ($20.79 vs. $19.03 on Sept. 6) is just above its 50-day SMA at $20.51 and stayed well below its 200-day SMA at $23.62. My semiannual value level is $19.20 and a semiannual risky level at $22.88.

PulteGroup ($17.18 vs. $15.47 on Sept. 6) is between its 50-day and 200-day SMAs at $16.60 and $19.17. My semiannual value level is $14.85 with a quarterly risky level at $19.37.

Ryland Group ($41.87 vs. $35.85 on Sept. 6) has been the best performer since Sept. 6 up 16.8% and is above its 200-day SMA at $39.80. My weekly value level is $36.99 with a quarterly pivot at $41.16 and monthly risky level at $42.96, which was exceeded at the Sept. 18.

Standard & Pacific ($8.05 vs. $7.35 on Sept. 6) is between its 50-day SMA and 200-day SMAs at $7.84 and $8.21. My weekly value level is $7.43 with a semiannual pivot at $7.58 and semiannual risky level at $8.73.

Toll Brothers ($33.14 vs. $30.44 on Sept. 6) is between its 50-day SMA and 200-day SMAs at $32.19 and $33.66. My annual value level is $31.95 with a weekly pivot at $32.17 and monthly risky level at $34.56, which was tested on Sept. 18.

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

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

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