Buy The Dip In Home Builders? A Technical And Fundamental Perspective

On the 10-year anniversary of the 2008 housing market collapse, housing stocks are having their worst year of returns since the mortgage crisis, and investors are taking notice. Benzinga PreMarket Prep co-hosts Joel Elconin and Dennis Dick discussed what’s going on in the housing market on Monday's show.

Technical Breakdown

The iShares Dow Jones US Home Const. ITB and the SPDR S&P Homebuilders XHB are down 31.7 percent and 24.9 percent year-to-date, respectively. Profits are on the decline, and there’s no sign of a slowdown in the near future.

Elconin and Dick have been warning traders to sell any strength in home builder stocks for a while, and Dick said the trend has yet to change.

“Look at these charts--they all look awful,” Dick said. “The trend is absolutely not your friend.”

Elconin said a look at the monthly chart in the XHB suggests the ETF could find some support in the mid-$33's.

“You had two monthly lows back in December of 2016 at $33.48, your January low was $33.72, so maybe some shorts may begin coming in here keeping an eye on the $33.50 area,” he said.

Technicals Vs. Fundamentals

But while technical traders are watching the housing charts closely, Dick said traders should always stay mindful of the fundamentals.

“I’ll tell you, if you are just completely ignoring the technicals, and just saying look, they are in a rising interest rate environment and they are going to raise rates multiple times in 2019, from a fundamental perspective that is just not good for home builders and sold or potentially shorted home builders at the beginning of 2018, you got paid big time,” Dick said. “Those [technical] trends were absolutely straight up going into 2018.”

Dick said that the 2018 trading action in home builders should be a lesson for all technical traders.

“That’s why I say yeah, use technicals, but don’t be a one-trick pony. You need to understand how everything else works as well,” he said.

Wall Street’s Take

While the technicals indicate home builders may have more downside in the near future, Dick said the easy money on the rising interest rate trade has likely already been made at this point.

Here’s a look at the latest commentary from Wall Street on Toll Brothers Inc TOL, Lennar Corporation LEN and KB Home KBH:

• Oct. 15: Argus reiterated its Buy rating for Lennar and lowered its price target to $60.
• Oct. 17: Credit Suisse downgraded Lennar to Neutral and lowered its price target to $45.
• Oct. 18: Bank of America downgraded Toll Brothers to Neutral and lowered its price target to $38.
• Oct. 22: Deutsche Bank downgraded Toll Brothers to Hold and lowered its price target to $29.
• Oct. 22: Deutsche Bank upgraded Lennar to Buy and lowered its price target to $51.

Listen to the full discussion at 53:40 in the podcast version of the show below.

Related Links:

Deutsche Bank Turns Cautious On Homebuilders, But Upgrades Lennar, Meritage

Weakness Abounds In The Housing Market As Building, Sales Have Stalled