D.R. Horton, Inc. (DHI) is a benchmark homebuilder with a cross-nation footprint in constructing high-quality single-family homes. As a full-service builder, the company also provides mortgage financing. All major homebuilders performed miserably in 2018, with D.R. Horton stock ending the year deep in bear market territory with an annual decline of 35%.

Since bottoming at $32.19 on Dec. 24, the stock is up a solid 18% and was in bull market territory when it traded as high as $40.13 on Jan. 11. D.R. Horton shares are now 5.3% below this high, owing in part to a recent weakening in housing data. However, the stock is up nearly 10% year to date and is fundamentally cheap, with a P/E ratio of 8.93 and a dividend yield of 1.65% according to Macrotrends.

According to the S&P CoreLogic Case-Shiller Index in October, home prices have stabilized.

Case-Shiller Indices
S&P CoreLogic

The benchmark 20-City Composite posted a year-over-year rise of 5% in October, slowing from a 5.2% rise in September. This index fell by 35.1% from a high set in July 2006 to the cycle low set in March 2012. Since this low, the index is up 59.5% and is 3.5% above the July 2006 high. This is a re-inflated bubble.

The National Association of Home Builders (NAHB) Housing Market Index

NAHB/Wells Fargo Housing Market Index (HMI) and New Single-Family Starts

A decline in mortgage rates in December into January caused the Housing Market Index (HMI) to rise to 58 from 56 in January. The government shutdown prevented the release of housing starts for December, but there was a 3% year-over-year gain for single-family starts to 876,000 units. However, the slowdown seen in the fourth quarter leaves homebuilders with elevated inventories in some markets. This is reflected in the reading of 44 for the buyer traffic index, which is well below the neutral 50 reading.

As a warning, existing home sales slumped in December.

Existing Home Sales

According to the National Association of Realtors (NAR), existing home sales fell by 6.4% in December to a seasonally annual rate of 4.99 million units. At the beginning of 2018, I warned that existing home sales would not sustain the 5.5 million-unit level in 2018. In June, the median price of an existing home peaked at above $275,000 and is now $255,000. Scary statistics show that the U.S. population has grown by 18.5% in the new millennium, which translates to a population-adjusted decline of 18.6% below the turn-of-the-century sales.

Analysts expect D.R. Horton to post earnings per share of 78 cents when the homebuilder reports results before the opening bell on Jan. 25. Many analysts are worried about affordability caused by higher mortgage rates. Given the uncertainties related to the partial government shutdown and the tax consequences of the Tax Cut and Jobs Bill, potential buyers are keeping their wallets closed. These factors may make it impossible for D.R. Horton to offer forward guidance.

The daily chart for D.R. Horton

Daily technical chart showing the share price performance of D.R. Horton, Inc. (DHI)
MetaStock Xenith

The daily chart for D.R. Horton shows that the stock has been below a "death cross" since May 17, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. Under this signal, investors should be reducing holdings on strength to the 200-day simple moving average. This was doable on June 12, 2018, at $44.63 and again between Aug. 9 and Sept. 6, when the average was $45.31. This strategy obviously worked, as the 2018 low of $32.19 was set on Dec. 24.

The stock closed at $34.66 at the end of 2018, which was the input to my proprietary analytics. The result was the new levels that are shown as horizontal lines on the daily chart. My monthly value level is $34.99, which held as a pivot on Jan. 3. My semiannual, annual and quarterly risky levels are $44.52, $45.79 and $51.61, respectively.

The weekly chart for D.R. Horton

Weekly technical chart showing the share price performance of D.R. Horton, Inc. (DHI)
MetaStock Xenith

The weekly chart for D R Horton is positive, with the stock above its five-week modified moving average of $37.02 and above its 200-week simple moving average, or "reversion to the mean," at $34.92. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week rising to 59.58, up from 51.43 on Jan. 18.      

Trading Strategy: Buy D.R. Horton shares on weakness to my monthly value level at $34.99 and the 200-week simple moving average of $34.92 and reduce holdings on strength to my semiannual, annual and quarterly risky levels at $44.52, $45.79 and $51.61, respectively.  

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