Interest rates have surged, with the 10-year Treasury yield surpassing 5%, a level not seen since before the Great Financial Crisis. This increase directly affects mortgage rates, which are crucial for homebuilders like D.R. Horton.
The stock recently retested a critical resistance level of $140 after breaking below it last month, but its weak relative strength indicates potential for further declines. D.R. Horton has seen its stock drop 9% over the past month and 10% over the last three months, reflecting a relative strength score of 4 out of 10 compared to the S&P 500.
The company has also cut its full-year revenue guidance by about $1 billion, now projecting fiscal 2026 revenue between $32.5 billion and $33.0 billion, significantly lower than analyst expectations. This guidance cut highlights a slowdown in demand, with orders only growing by 0.1% year-over-year, compared to the anticipated 6%. Additionally, the widening gap between the mortgage rates D.R.
Horton is offering and the market rates complicates its position, as the 30-year mortgage rate has climbed to 7%. Analysts at Keefe, Bruyette & Woods have lowered their price target for D.R. Horton to $167, reflecting the broader underperformance of homebuilders against the S&P 500.
Given these factors, a bearish put spread is being considered to capitalize on potential further declines toward the $120 level, with a defined risk strategy in place. This trade involves buying a put option at $140 and selling another at $120, allowing for a maximum profit if the stock falls below $120 by expiration