Wednesday's Housing Starts number came in at 880k, falling
well below the 950k forecast and last month's 1048k reading. The
weak reading put a damper on the trading day and helped the SP
500 close lower by 10 points. Ever since the Great Recession we
have all been wondering when will housing finally come back.
I dug a little further into the data to shed some light on the
situation. Looking month to month for me is looking too close.
It's like choosing a stock based on the closing price of the last
two trading days. When investigate stocks my charts always have a
moving average to help determine trend. And if there has been a
magnificent run or a precipitous drop I apply Fibonacci analysis.
Let's pretend that Housing Starts data is a stock and get to
If this was a stock, I'd be buying it right here. The magical
25x5 SMA perfectly supports the data points along the way up.
Starts peaked in January 2006 at 2273k. We dipped below the 25x5
in 2006 and dropped all the way down to 490k before the ride was
over. We bounced along the bottom until finally popping back
above the 25x5 in 2011. Last month's number, harsh as it was, is
still well above the SMA and therefore still riding a bullish
wave in a positive trend. Hurray Housing!
Now take the peak to the drop and draw in Fibonacci
retracement levels. If this was a stock I would look for short
term resistance at each of these levels as they were approached
and look for these levels to provide support once breached.
Housing starts approached 1171, hitting 1101, before pulling back
just shy of 910 this month at 880. 30k in the grand scheme of
things is a blink of an eye. I would be surprised if next month's
number was significantly lower than 910.
Again, if Housing Start data was a stock, I'd be pounding the
table with two fists on this one (assuming the Zacks Rank was #1
or #2). Looking at the longer term picture, housing starts have a
tendency to stay on the bullish side of the 25x5 SMA for several
years as it recovers. The last housing boom lasted the entire
decade of the 90s and the first half of the 2000s. Extreme levels
almost always hit 2000k, more than twice where we are now. At
880k we are near what historically was a low prior to the unusual
activity of the last 8 years or so.
Now for the fun part. Let's find some stocks that will benefit
from a continued recovery in housing starts. The most obvious
sector is the home builders. With a Zacks Industry Rank in the
top 11% you can expect to see a few Zacks Rank #1 (Strong Buy)
stocks on the list.
William Lyon Homes
) is a single family home builder in California, Arizona, Nevada
and Colorado. Since going public in May 2013 the stock has
bounced around from $20 to $29.50 where it is today. The Zacks
Rank #1 (Strong Buy) rests on a single analyst that covers the
stock so far. With earnings estimated to hit $2.27 per share this
year and $3.45 next year the stock has been running up in
The chart looks like a bottle rocket. This year alone the
stock has risen from $22 to $30 without any major pull back.
Stochastics are unsurprisingly overbought and the 25x5 is a
distant memory down at $23.22. I know I'm supposed to be the guy
that buys high and sells higher, but this stock seems a bit
overdone for the time being. If it pulls back to $27 with a
stochastic below 50 I'll take it but right now it's a little rich
for my blood.
Another West Coast builder to look at is
Taylor Morrison Home Corp
). This Zacks Rank #1 (Strong Buy) builds single-family homes in
Florida and Texas in addition to Arizona, California and
Colorado. Another relatively new issue, TMHC came public in 2013.
Here the chart looks to be range bound which could present a
great opportunity if it breaks out. Entrenched in a battle of the
bulge from $20 to $24 since July, the stock could either turn
south here on a failed breakout, or bust the range and go higher.
Two ways to play it are wait for $20 and load up, or throw a GTC
limit order at $24.50 and play the breakout.
Now for the big dog.
D. R. Horton
) is one of the largest homebuilders in the US. The company has a
presence in just about every corner of the country and pulls a
Zacks Rank #1 (Strong Buy). In the last 30 days eight analysts
have revised their current year estimates to the upside, raising
the consensus from $1.58 per share to $1.65.
The chart is easier to stomach than the other two. DHI sits
above an upward sloping 25x5 SMA setting it firmly in an uptrend
since mid-December. The stochastics are almost neutral, meaning
another day or two we could be oversold and looking for a trigger
to buy. The May 2013 high around $27.50 is probably a good price
target and helps set your reward at 18% from today's close.
Scooping some shares up at $23 with a stop loss tight at $21.50
gives you a 3:1 risk/reward ratio.
D R HORTON INC (DHI): Free Stock Analysis
TAYLOR MORRISON (TMHC): Free Stock Analysis
WILLIAM LYON HM (WLH): Get Free Report
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