Homebuilder Stocks Extend Gains Amid Surging Home Sales

Analysts believe new home sales increased by 1.3% in July

Several leading homebuilder stocks rocketed to fresh all-time highs Friday after data revealed healthy buying interest and tightening supply in the housing market despite the ongoing pandemic. According to the National Association of Realtors, sales of existing homes soared 24.7% in July month over month, with the median price of a home sold last month increasing 8.5% from a year ago to $304,100, per CNBC. Meanwhile, supply of existing homes contracted 21.1% annually as many sellers remained on the sidelines amid the economic uncertainty.

Key Takeaways

  • Sales of existing homes soared 24.7% in July from June.
  • Lennar Corporation (LEN) shares generated a golden cross buy signal in late June.
  • A rising three methods pattern on the NVR, Inc. (NVR) chart indicates upside continuation.
  • The SPDR S&P Homebuilders ETF (XHB) finds a confluence of support at $49 from an early 2020 swing high and the 50-day simple moving average (SMA).

Investors will gain further insight into the housing recovery Tuesday when the U.S. Department of Commerce releases its new home sales data for July. Analysts expect sales of newly built homes to inch up 1.3%, adding to June's monthly gain of 13.8%.

Below, we take a closer look at two homebuilder stocks and an exchange-traded fund (ETF) that specifically tracks the group. We'll also analyze the charts to identify possible trading opportunities.

Lennar Corporation (LEN)

Lennar ranks as the largest homebuilder in the United States by revenue after its 2018 merger with CalAtlantic. The company reported second quarter adjusted earnings of $1.65 per share on sales of $5.29 billion. The top line grew 27% from the year-ago quarter due to improved cost efficiencies and operating leverage. As of Aug. 24, 2020, Lennar stock issues a small 0.65% dividend yield and has gained nearly 35% in the past three months.

The share price has continued trending higher since climbing above its pre-pandemic peak. Moreover, the 50-day SMA crossed above the 200-day SMA in late June to generate a golden cross buy signal. Those who want to play the bullish momentum should consider using a trailing stop to let profits run. For instance, traders could stay in the position until price closes beneath a 10-day moving average.

A golden cross is a bullish signal in which a relatively short-term moving average crosses above a long-term moving average, often indicating a new uptrend.

Chart depicting the share price of Lennar Corporation (LEN)

NVR, Inc. (NVR)

Reston, Virginia-based NVR builds single-family detached homes, town houses, and condominiums. Although the $15.64 billion homebuilder's earnings fell short of expectations by 5.3% and declined 19.9% from the June 2019 quarter, new orders increased 13% from the prior year. The company also said its backlog – which represents potential future housing revenues – increased 14% during the quarter. Year to date, NVR shares are up almost 11%, with the stock adding an impressive 35.20% since late May as of Aug. 24, 2020.

The stock has formed a rising three methods-like pattern above crucial resistance at $4,045, indicating further upside continuation. Those who buy here should again think about using a trailing stop to book profits. As an alternative to a moving average, traders could remain in the market until price closes below the blue dotted trendline connecting recent price action.

A rising three methods formation is a bullish continuation candlestick pattern that occurs in an uptrend and indicates a resumption of that trend.

Chart depicting the share price of NVR, Inc. (NVR)

SPDR S&P Homebuilders ETF (XHB)

Created in 2006, the SPDR S&P Homebuilders ETF aims to provide a similar return to the S&P Homebuilders Select Industry Index. As well as offering exposure to leading homebuilder names, the fund invests in home construction supply and appliance stocks, such as Masco Corporation (MAS) and Whirlpool Corporation (WHR). XHB controls assets under management (AUM) of $808 million, yields nearly 1%, and has rallied 36.42% in the past three months as of Aug. 24, 2020.

Since mid-June, the ETF's price has trended sharply higher. Tactical traders who intend to exploit the bullish uptrend should keep a tight stop, given the relative strength index (RSI) sits in overbought territory. More conservative traders may look for a retracement entry to the $49 level, where price finds a confluence of support from the January/February swing high and rising 50-day SMA.

The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.

Chart depicting the share price of the SPDR S&P Homebuilders ETF (XHB)

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

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