D.R. Horton, Inc. (DHI) is a benchmark homebuilder, as it has a cross-nation footprint. As a full-service builder, the company also provides mortgage financing. It has been a tough year for homebuilder stocks despite more normal P/E ratios. D.R. Horton is down 26.8% year to date and is deep into bear market territory at 29.9% below its 2018 high of $53.32 set on Jan. 4. The stock has been on the rebound lately, up 8.7% since setting its 2018 low of $34.37 on Oct. 23.
Analysts expect D.R. Horton to post earnings per share of $1.23 when it reports results before the opening bell on Nov. 8. Many analysts have been reducing expectations for the current quarter but look for a double-digit increase in revenue year over year. Overall, homebuilder stocks have been sliding recently as home sales have stalled in recent months. Homebuilders have been concerned about affordability on higher building costs and higher mortgage rates.
The overall rise in home prices has slowed
The S&P CoreLogic Case-Shiller 20-City Composite for home prices rose 5.5% in August, down from 5.9% in July.
The 20-City Composite peaked in July 2006 and declined 35.1% to a low set in March 2012. In my opinion, that low was a return to the inflation-adjusted uptrend for home prices. Since then, the house price bubble has re-inflated. In August 2018, home prices in the 20-city index are up 59.4%, and prices are 3.5% above the July 2006 peak. This is the main reason why homes are priced at what can be considered the worst affordability level ever!
The daily chart for D.R. Horton
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 lay ahead. This signal obviously worked, as the 2018 low of $34.37 was set on Oct. 23. Note that the 200-day simple moving average was tested between Aug. 21 and Sept. 6, providing an opportunity to sell the stock at around $45.45, which lines up with my annual pivot.
The stock is below four horizontal lines that are my monthly, semiannual, annual and quarterly risky levels of $41.10, $44.56, $45.45 and $48.78, respectively. My value level for this week is $34.71.
The weekly chart for D.R. Horton
The weekly chart for D.R. Horton is negative but oversold, with the stock below its five-week modified moving average of $38.59 and above its 200-week simple moving average, or "reversion to the mean," at $34.37, which held on weakness during the week of Oct. 26. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 17.65, below the oversold threshold of 20.00.
Trading Strategy: Buy weakness to the 200-week simple moving average of $34.37, which lines up with this week's value level of $34.71, and reduce holdings on strength to my monthly, semiannual and annual risky levels of $41.10, $44.56 and $45.45, respectively.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.