KB Home (KBH) reports earnings on Jan. 11, shining a light on the residential construction market just two months after Donald Trump’s election victory triggered a surge in borrowing costs across all loan classes. The results may generate discussion about rising industry costs if the new president follows through on campaign pledges to deport millions of undocumented immigrants.

It’s rumored that homebuilders utilize the highest number of illegal workers in the United States, outside of the hospitality and restaurant businesses, in order to keep costs low and stay competitive. Construction industry union membership stood at 13.2% in January 2016, according to a Department of Labor Statistics survey, raising odds a labor shortage triggered by repatriating Mexican nationals will drive up membership, forcing builders to charge more for new homes.

KBH Long-Term Chart (1993-2017)

KBH

The stock struggled between the mid-1980s and the late-1990s, stuck under heavy resistance in the low teens. It broke out in 1998 but upside momentum failed to develop, giving way to two years of testing in high single digits. Aggressive buyers finally took control in the second-half of 2000, setting off a powerful uptrend that matched similarly bullish movement throughout the real estate space.

The torrid rally finally peaked in the low 80s in 2005, yielding a yearlong double top, followed by a 2006 breakdown that gathered momentum into November 2008. The stock lost more than 90% of its value into the 11-year low at $6.90 and bounced to 20 in 2010, where aggressive sellers returned in a secondary downtrend that reached a 20-year low at $5.09 in August 2011.

The subsequent bounce cleared the 2008 low a few months later, setting of a long-term 2B buy signal, denoting the failure of bears to hold a resistance level. The rally continued into the mid-20s, topping out in 2013 and giving way to a slow motion pullback that accelerated into 2016 where it posted a potential higher low. Price action since that time has carved a 100% retracement of the June 2015 into January 2016 selling wave, with price now stuck at 2-year resistance near $17.25.

Active weekly and month Stochastics sell cycles weigh on current price action and could mark the deciding factor in how the stock reacts to this week’s earnings report. In a vacuum, the technical setup predicts a sell-the-news reaction that could generate a test at moving average and trendline support near $15. However, positive factors on the daily pattern could alleviate or negate that bearish outcome.

KBH Short-Term Chart (2014-2017)

KBH

The decline off the 2013 peak carved a series of lower highs that formed a broad trendline (blue line), broken to the upside in January 2016. New support got tested relentlessly for five months, ahead of a post-election rally that completed the V-shaped pattern into the June 2015 high. It’s now consolidating at that level, with a strong earnings report having the power to trigger a breakout that targets the 2014 high near $21.

On Balance Volume (OBV) entered a distribution phase in the middle of 2014, with lower highs and lower lows continuing into January 2016. It’s drawn a steady recovery since that time and is now challenging the multiyear high. This underlying strength signals loyal sponsorship that should support higher prices. Even so, the broad pattern suggests progressive rather than spectacular gains within a two sided market.

The Bottom Line

KB Homes has emerged as a top industry performer that could gain additional ground in reaction to a strong quarterly report but homebuilders faces potential headwinds in coming years if they lose low paid under-the-table workers and are forced to hire a higher percentage of well-paid union labor.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

 

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