Housing Data and Lennar Earnings Miss Shake Homebuilder Foundations

Lennar Corporation (LEN) released its latest quarterly earnings report before the opening bell this morning and missed analysts' estimates. The stock dipped to $49.00 in pre-market trading but then rebounded to as high as $51.34 before the open. The homebuilder touted lower mortgage rates and moderating home prices as catalysts for the market for single-family homes to improve as the weather improves.

Lennar stock closed Tuesday, March 26, at $49.71, up a solid 27% so far in 2019 and in bull market territory at 33.3% above its Dec. 26 low of $37.23. This is another case of a stock consolidating a longer-term bear market. Lennar stock is 23.4% below its April 5, 2018, high of $64.90 and 26.6% below its July 2005 high of $67.68. I began 2019 bullish on the homebuilders based on the bottoming patterns on the charts and single-digit P/E ratios. Lennar has a P/E ratio of 8.19 according to Macrotrends.

Here's a scorecard for five major homebuilders

On March 18, the National Association of Home Builders announced that its Housing Market Index for March held steady at 62, well above the neutral threshold of 50. This implies that builders are optimistic that the slowdown of the fourth quarter has stabilized and that a solid spring buying season is likely. On the flip side, despite stable prices and lower mortgage rates, affordability remains an issue. Builder concerns are the availability of skilled labor, lack of buildable lots and zoning restrictions in major metro markets. This concern is reflected in the buyer traffic component, which fell four points to 44, below the neutral level of 50.

On March 26, the U.S. Housing and Urban Development and Commerce Department reported that housing starts for February fell 8.7% to a seasonally adjusted annual rate of 1.16 million units. The key measure of single-family starts fell 17% to 805,000 units vs. 970,000 in January. I would not be too concerned about this volatility, as the government shutdown made it difficult to catch up with these statistics.

Also, on March 26, S&P Dow Jones Indices reported that its S&P CoreLogic Case-Shiller Index showed the lowest annual gains in January since 2015. I track the 20-City Composite, which posted a year-over-year gain of just 3.6%, down from 4.1% in December. From a peak in July 2006, home prices declined 35.1% to lows set in March 2012. Since then, home prices are up 58.4% and 2.9% above the peak. I have been viewing this as a re-inflated bubble.

The daily chart for Lennar

The daily chart for Lennar shows that the stock is in the process of confirming a "golden cross," as the 50-day simple moving average at $47.26 is about to rise above the 200-day simple moving average at $47.33. If this is confirmed today or tomorrow, the signal is that higher prices will follow. The stock set its Dec. 26 low of $37.29 and closed that day at $39.46, above the Dec. 24 high of $38.92, confirming a "key reversal," which signals that a tradeable rally is beginning.

The stock closed Dec. 31 at $39.15, which was an important input to my proprietary analytics. This resulted in semiannual, quarterly and annual risky levels at $52.00, $58.76 and $64.25, respectively. The close of $47.98 on Feb. 28 was input to my analytics and resulted in a monthly value level at $40.58. Note that this morning's high of $51.96 was pennies away from my semiannual risky level.

The weekly chart for Lennar

The weekly chart for Lennar is positive but overbought, with the stock above its five-week modified moving average of $49.29. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $49.29. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 81.36 this week, up from 80.75 on March 22, and both readings are above the overbought threshold of 80.00.

Trading strategy: Buy Lennar shares on weakness to the 200-day simple moving average at $47.33 and reduce holdings on strength to the semiannual risky level at $52.00.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original quarterly, semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January and February.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.