Should Traders Chase the Builders At These Levels?

The home builders sure are tempting aren't they? The group continues to benefit from spurts of institutional buying as big investors bet that the builders have made it through the worst of it. Earlier this week, August housing starts were a bit of a disappointment. They came in at 750,000 units, below the consensus estimate of 770,000. Starts in July were revised lower to 733,000 from 746,000. The good news was found in existing-home sales. They soared 7.8% from July to 4.82 million units, well above the consensus estimate of 4.58 million. A common pitfall for investors is to chase performance. But buying too late is an easy way to lose money. At this point, it might better to wait for builders to pause and consolidate gains. The strongest performers in the group like Ryland Group

, D.R. Horton

and PulteGroup

could all come down to their respective 10-week moving averages and find support. If they do, it would be a viable area to start a small position. The other scenario is that they start moving sideways, holding gains in light volume. Price action like this is good to see after a breakout as it may be a sign of support. KB Home

had more good news for the home-building sector earlier today after the company reported solid earnings. The Thomson/Reuters consensus estimate called for a loss of $0.16 a share but KB Home turned a profit of $0.04 a share. Sales rose 16% from a year ago to $424.5 million, a little below the consensus estimate of $430 million. The company delivered 1,720 homes in the quarter, up 7% from a year ago. The average selling price rose 8% to $245,100. KB Home also said that potential future housing revenues in backlog rose to $744.7 million in the quarter, up 33% from a year ago. Note that KB Home is not the leader in the group even though several above-average volume gains in the stock point toward institutional buying as well. While the group leaders broke out weeks ago, KB Home is still trying to break free from a long, u-shaped base that started in March. It recently broke out over $10.76, its intraday high set on July 10, but still has its 52-week high of $13.12 to contend with. The iShares Dow Jones U.S. Home Construction Index Fund

continues to perform well but it after a technical breakout over $16.30 in late June, it has extended in price. Shares were recently trading around $20.19. While the headlines remain mostly positive in the home-building sector, there might be no need to chase here. If the market pulls back constructively in coming weeks, home builders will likely pause along with it and new bases will form. When the builders digest recent gains, new entry points will most likely be seen.