4 Homebuilders Trading on Shaky Foundations

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Tuesday’s push higher for the broader markets was sure to have delighted most bulls, but the housing sector’s industry giants continue trading on shaky foundations more suited for bears.

4 Homebuilders Trading on Shaky Foundations (KBH, DHI, TOL, PHM)

Despite the continued easy money narrative that’s still finding buyers — helping the likes of the S&P 500 Index to move within 1% of its April high and roughly 3% from last summer’s all-time-highs — homebuilders are lagging from a technical perspective and continue to point toward lower prices.

Having said that, let’s examine the charts and options of four homebuilders in particular and see about building a better home for bears to flip for a profit.

Homebuilders to Short: KB Home (KBH)

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Source: Charts by TradingView

The homebuilder has established a classic downtrend far removed from KBH’s broken uptrend in 2014, and not to mention the 2005 high of $85.45 when investment buzzwords like “land shortage!” were all the rage with the sell side.

While all trends do eventually come to an end, many persist longer than the naysayers believe possible. And in our estimation, KBH’s chart does nothing to counter this view.

Reviewing the KBH options board, the July $12 put for 42 cents is an interesting play in lieu of shorting this homebuilder.

A bearish trader purchasing this KBH put limits risk to the debit paid and what amounts to being a fraction of the risk associated with shorting a stock.

Shares of KBH do, of course, need to head lower to realize any kind of meaningful return.

Bottom line, with earnings in mid-June, limited risk and the opportunity for bearish momentum within the established down channel, this KBH put is an attractive bearish position.

Homebuilders to Short: Toll Brothers Inc (TOL)

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Source: Charts by TradingView

The provided weekly view shows TOL was a bit slower in giving up its uptrend compared to KBH. In 2016, however, it’s been a different story for this homebuilder.

TOL has also come under bearish pressure despite a continued low interest rate environment that’s been a boon for the broader market. After rallying from its February corrective lows, TOL hit resistance at prior lateral support in a bearish flag pattern.

With plenty of visible overhead resistance, a break below the $24 area and 62% Fibonacci support should find this homebuilder moving aggressively lower before TOL buyers may look to step in.

Given earnings in a couple weeks and reasonable premiums, TOL is another homebuilder where a long put strategy can be approached.

Reviewing the TOL options board, the weekly June 24 $25 put for 55 cents is an attractive risk-to-reward situation bearish traders may want to consider.

Homebuilders to Short: D.R. Horton (DHI)

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Source: Charts by TradingView

A lower-high pattern, which formed in April against 2015’s uptrend line, confirmed resistance and a bearish reversal as being in play in DHI.

Technically, shares of DHI are consolidating below the 50- and 200-day simple moving averages on the daily chart. A price break below $29 should confirm additional resistance and provide bearish momentum.

DHI doesn’t report until late July. But given reports in the coming couple weeks from its homebuilder peers, buying the June $29/$27 bear put spread is attractive.

Currently priced for 47 cents the spread cuts down decay and volatility risks, offering a return in excess of 300% should investors decide to pull down DHI shares below $27 by June expiration.

Homebuilders to Short: PulteGroup, Inc. (PHM)

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Source: Charts by TradingView

Technically, shares of Pulte Homes fall in the middle of the pack in terms of performance over the past couple years.

More importantly, if we’re to believe the current downtrend in this homebuilder can continue, PHM is pointing toward lower prices. This strategist, if you couldn’t guess, does.

With a weekly lower high in place set against channel resistance, an eventual test of channel or double bottom support from $14 to $15 in PHM is likely in the cards.

Reviewing the PHM options board, the July $17 put for 45 cents is structurally appealing given interim earnings reports from peers and sufficient holding time to see if PHM can move lower without breaking the bank.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/homebuilders-kbh-tol-dhi-phm/.

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