Base-Building Home Builders
Never forget that the market discounts
the future. So as trader, don’t let conflicting information cloud your take on
an industry group. Look to the market for your answers. Let’s look
at the home builders.
On Monday, two reports show sales of
new and previously owned U.S. homes fell in February but also indicated the
housing market remains one of the strongest areas in the U.S. economy. The
National Association of Realtors reported that seasonally adjusted sales of
previously owned homes slowed 0.4% last month. A government report indicated
sales of new homes decline for the second straight month in February.
However, these declines are coming at
a time of falling mortgage rates. Last week, 30-year mortgage rates fell to
6.89%, the lowest average since mid-January. Seven percent is a mortgage rate
level considered the threshold for supporting home buying. A year ago, 30-year
mortgage rates averaged 8.23%.
How do I make sense of this
convergence of positive and negative information? I look at the stock charts.
And so far, the message favors the long trade. Home builders Pulte
(
PHM |
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News |
PowerRating),
Lennar
(
LEN |
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PowerRating) and Toll Brothers
(
TOL |
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Chart |
News |
PowerRating) all closed up Monday. All are
forming the right sides of correction-recovery bases with relative strength
lines entering or nearing new high ground. While promising, the chart patterns
are not picture perfect. They have some work to do before becoming ripe for the
medium-term trade.
Pulte has pulled above inter-base
resistance around 38, its mid level (located just under 38 1/2), as
well as its 50-day moving average, all good signs. However, the recent price
action is looking wedgy. I’d like to see it move up into the 41 range, clearing
the next resistance level, then drift downward and consolidate before I looked for possible entries.  Â
Lennar looks best of the trio. The
stock is verging on a breakout to new high ground. However, the stock has not
put in a proper handle. Notice the heavy volume over the past week. Ideally, the
stock would consolidate here and drift lower on light volume before taking off.
Monday was an accumulation day, a good sign.
Toll Brothers has the most work to do,
but the stock is rounding the right side nicely so far. I would insist that the
stock clear resistance at 40 and consolidate in good order before looking for
entries. A short-term trader could use the 40 as the basis for a pivotal point.
(By the way, some of you have asked me why I don’t use the more common term
“pivot point.” Sometimes, I do. But my hero, Jesse Livermore,
the original and greatest intermediate-term trader, coined the term
“pivotal point,” so that’s my personal preference!)
