Homebuilder stocks gain on rising housing activity

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After trading sideways for several months, homebuilding stocks regained their mojo on Thursday after encouraging data showed the housing market boom shows no signs of slowing, despite a hesitant economic recovery amid soaring prices. cases of COVID-19 and the lack of further government stimulus.

Key points to remember

  • An increase in housing starts and building permits indicates continued strength in the housing market.
  • Shares of PulteGroup, Inc. (PHM) broke above a descending triangle on high volume on Thursday, suggesting further upside.
  • The iShares US Home Construction ETF (ITB) broke above a two-month symmetric triangle and the 50-day simple moving average (SMA), indicating bullish momentum.

Housing starts in November rose 1.2% to 1.547 million units, just below February’s pre-pandemic figure of 20,000 units, according to the Commerce Department. Additionally, building permits, which typically precede housing starts by up to two months, jumped 6.2% to 1.639 million units in November.

Near-historic low interest rates and people assessing their living situation during the pandemic have worked together to support strong demand. “Single-family housing continues to be well supported by strong demand and low mortgage rates,” High Frequency Economics’ Rubeela Farooqi told clients in a research note cited by MarketWatch.

Below, we review one of the nation’s leading homebuilders and an industry-themed exchange-traded fund (ETF). We will also elaborate several chart-based trading ideas.

PulteGroup, Inc. (PHM)

With a market capitalization of $12 billion, PulteGroup is one of the leading homebuilders in the United States, operating in 44 markets in 24 states. The company, which primarily builds single-family homes, posted third-quarter earnings of $1.34 per share, significantly higher than the $1.12 figure that analysts had expected. Additionally, the Atlanta-based homebuilder’s backlog — orders to close — stood at 14,962 at the end of the quarter, up 29% from a year earlier. PulteGroup stock issues a dividend yield of 1.32% and has gained 4.44% over the past month, beating the industry average of 7% as of December 18, 2020. Year-to-date, shares are trading up 16.70%.

The stock broke above a descending triangle on strong volume on Thursday, suggesting further upside over the next few days. Additionally, the Moving Average Convergence Divergence (MACD) indicator recently broke above its trigger line to generate a buy signal. Those buying at these levels should anticipate a move back towards the top of the triangle, where price finds resistance at $49.57. Cut losses if the stock reverses below the upper trendline of the pattern at $43.

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Resistance, or a resistance levelis the price at which an asset encounters pressure in its progression by the emergence of an increasing number of sellers who wish to sell at this price.

iShares US Home Construction ETF (ITB)

Traders can gain broad exposure to the group by investing in the iShares US Home Construction ETF. The fund aims to replicate the performance of the Dow Jones US Select Home Construction Index composed of stocks in the residential construction sector. Industry big names DR Horton, Inc. (DHI) and Lennar Corporation (LEN) lead a portfolio of around 50 holdings. On the trading front, nearly 3.5 million shares trade daily at narrow penny spreads to provide ample liquidity. As of December 18, 2020, ITB controls a sizable asset base of $2.09 billion, earns a modest 0.42% and trades up 24.44% on the year. Yields over the past month have been relatively stable.

ITB shares staged a convincing break above a symmetrical two-month triangle and the 50-day SMA on Thursday, opening the door for continued bullish momentum. Like PHM, a cross of the MACD indicator above its trigger line this week flashes a buy signal. Active traders entering here should set a take profit order near the top of the pattern at $60.8 while managing risk with a stop placed below the lower trendline of the triangle at $55.

TradingView.com

A order for profit (T/P) is a type of limit order that specifies the exact price at which to close an open position for a profit.

Disclosure: The author held no position in the aforementioned titles at the time of publication.

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