Homebuilder Stocks Gain on Increasing Housing Activity - Investopedia

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

Key Takeaways

• An increase in housing starts and building permits indicates ongoing housing market strength.
• PulteGroup, Inc. (PHM) shares broke above a descending triangle on heavy volume Thursday, suggesting further upside continuation.
• The iShares U.S. Home Construction ETF (ITB) broke out above a two-month symmetrical triangle and the 50-day simple moving average (SMA), indicating bullish momentum.

According to the Commerce Department, November housing starts rose 1.2% to 1.547 million units, falling just short of February's pre-pandemic figure by 20,000 units. Moreover, building permits, which typically lead starts by up to two months, jumped 6.2% to 1.639 million units in November.

Near record-low interest rates and people evaluating their living situation during the pandemic have worked together to underpin strong demand. "Single-family housing continues to be well-supported by strong demand and low mortgages rates," Rubeela Farooqi from High Frequency Economics 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'll also hammer out several chart-based trading ideas.

PulteGroup, Inc. (PHM)

With a market capitalization of $12 billion, PulteGroup is a leading U.S. homebuilder, operating in 44 markets across 24 states. The company, which primarily builds single-family detached homes, reported a third quarter profit of $1.34 per share, substantially above the $1.12 figure analysts had expected. Furthermore, the Atlanta-based homebuilder's backlog – orders to be closed – tallied 14,962 at the end of the quarter, up 29% from a year earlier. PulteGroup stock issues a 1.32% dividend yield and has gained 4.44% over the past month, outpacing the industry average by 7% as of Dec. 18, 2020. Year to date, the shares trade 16.70% higher.

The stock broke above a descending triangle on heavy volume Thursday, suggesting further upside continuation over the coming days. Additionally, the moving average convergence divergence (MACD) indicator recently crossed above its trigger line to generate a buy signal. Those who buy at these levels should anticipate a move back up to the triangle's apex, where price finds resistance at $49.57. Cut losses if the stock reverses below the pattern's top trendline at $43.

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Resistance, or a resistance level, is the price at which an asset meets pressure on its way up by the emergence of a growing number of sellers who wish to sell at that price.

iShares U.S. Home Construction ETF (ITB)

Traders can gain broad exposure to the group by investing in the iShares U.S. Home Construction ETF. The fund aims to track the performance of the Dow Jones U.S. Select Home Construction Index comprising stocks in the home construction sector. Leading industry names D.R. Horton, Inc. (DHI) and Lennar Corporation (LEN) head a portfolio of around 50 holdings. Trading wise, nearly 3.5 million shares exchange hand per day on narrow penny spreads to provide ample liquidity. As of Dec. 18, 2020, ITB controls a sizable $2.09 billion asset base, yields a modest 0.42%, and trades 24.44% higher on the year. Returns over the past month have been relatively flat.

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

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

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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