Place your bets on the Homebuilders (Z,DHI,KB)

Roulette Number 7

This week is all about housing, with Existing-home sales, new-home sales and quarterly results on tap from Toll Brothers.

The 3 stocks we recommend looking at are Zillow (Z), D.R. Horton (DHI) and KB Home (KBH).  The data should give a strong indication of the end of the spring home selling season, which by many accounts, was stronger than expected.
New-home sales, also coming Wednesday, could spike by 8% to 355,000 units annualized from 328,000 units in March, writes Credit Suisse, which is far more bullish than consensus for a gain of 2%.

“Our estimate is based on our market checks along with the higher single-family construction in April (census new-home sales data typically follow moves in starts/permits) as well as the upward revisions to recent months for construction,” the firm writes. “This, coupled with a seemingly anomalous 7% decline in reported March new-home sales (which was in contrast to our market checks and comments from public home builders) should lead to a pop in reported April sales.”

Now let's get to the stocks.

Zillow (Z) had a great Q1 earnings call, where shares jumped from $34 to $43 over a couple of days. However, Zillow shares went into freefall over that last week, giving back most of the gains as market volatility picked up and the Facebook IPO flopped.

Zillow is a little risky here because one could argue that Zillow rose so much recently because of the Facebook IPO. So proceed with caution - risk should be pretty easy to manage here since it's trading very close to the 50 day moving average, and the chart is printing a huge hammer candlestick today. If the bulls fumble the ball on this one and can't keep the share price above the 50 day MA, have an exit strategy in place.

D.R. Horton (DHI) has held up fairly well during the turmoil in the market over the last few weeks. It's trading right in the middle of a rising channel - we expect shares to pop to $18-$19 if housing data is good and down to $15 or lower if the data is bad.

KB Home (KBH) was recently downgraded by Barclays from $15 to $10. Shares made it all the way to $13 in April before crashing back down to $7.20 today. KBH could get a quick pop on good Housing News but don't hold on to your shares for too long.