- KB Homes (KBH) is down 35% from its January high.
- DR Horton (DHI) breached a significant support zone amid heavy volume.
- Home Depot (HD) has entered a steep downtrend beneath all major moving averages.
Rising mortgage rates are taking a toll on homebuilding stocks. The entire industry has seen share prices fall into bear market territory. Worse yet, they didn’t participate in the S&P 500‘s robust recovery over the past two weeks. The lack of buoyancy is an ill omen, and the underperformance in 2022 has now widened considerably.
On Thursday, Freddie Mac reported that the average interest rate for 30-year mortgages has ballooned to 4.67%. One week ago, it stood at 4.42%. And a year ago, it averaged only 3.18%. According to the Mortgage Bankers Association, this is the fastest rise in rates in over a decade. First-time home buyers have already had to grapple with record-high housing prices. Now higher borrowing costs are compounding the problem.
Investors aren’t optimistic about the impact on builders. They’ve been punishing their share prices and kept them down even as the rest of the market has come roaring back. I find the technicals troublesome. Here are three homebuilding stocks to sell.
Homebuilding Stocks to Sell: KB Homes
KB Homes (NYSE:KBH) has been sinking ever since its January earnings announcement delivered a fakeout for the ages. Shares leaped higher on the robust report and finished well higher on the following day after breaking above significant resistance. But, alas, the breakout wasn’t meant to be. Prices promptly reversed and have been trading lower ever since. Last week’s earnings announcement saw sellers swarm, sending KBH stock below significant support at $35.
With prices submerged beneath all moving averages and the 200-day rolling over, KBH is firmly in bear territory. Overhead resistance looms large, and rallies are suspect. And even though the stock has already fallen considerably, it can go much lower. I think $30 is the next stop.
To capitalize, consider buying put spreads.
The Trade: Buy the July $30/$25 put spread for $1.25.
Homebuilding stocks carry a high degree of correlation. Thus, you’ll see similarities in the trajectory of their share prices. The deterioration in DHI stock has mirrored KBH. The 20-day, 50-day, and 200-day moving averages are all pointing lower. Every rally this year resulted in lower swing highs to confirm increased aggression by sellers and an inability of buyers to pull DHI out of its tailspin.
Thursday’s session was significant. Shares tumbled 3%, and volume swelled to its highest levels since last May. More than 7.3 million shares changed hands as turnover surged beyond that seen following the previous three quarterly reports. The participation uptick came because of prices cracking critical support at $76. The last three times we tested this floor, bulls defended it.
But not this time.
The change in character doesn’t bode well for the future. My preferred way to play is once again with put spreads.
The Trade: Buy the May $75/$70 put spread for $1.85.
Homebuilding Stocks to Sell: Home Depot
While not an actual homebuilder, Home Depot has closely tracked the unraveling homebuilding stocks. Thursday’s downdraft was a perfect example. HD stock slumped on heavy volume, echoing the damage seen in DHI, KBH, and the like. Unfortunately, Home Depot finds its share price sinking below all major moving averages. Cracking the psychologically significant $300 zone is just one more nail.
There isn’t much support until $285, so that’s the logical first target for this support break. While I don’t mind buying put options outright, the lofty share price suggests a spread is likely the better route. The cost and risk will be far cheaper.
The Trade: Buy the June $300/$280 put spread for $7.30.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.