Two weekends ago on Sunday, July 28th, I wrote the following subsection in my Weekly Strategy Session. Given the persistent weakness in the homebuilders and many home construction stocks, not to mention Zillow selling off sharply post-earnings on Tuesday, the analysis below is still in play. Recall that housing has been an integral part of this economic recovery the past several years. As a result, paying attention to the price action there remains critical.
A Word on Housing and Price Action
Courtesy of Bespoke Investment Group, you can see that new home sales hit a five-year high in June, the highest reading since May 2008.
We know that the homebuilders and indeed many parts of the housing-related complex have thrived in recent years. For all intents and purposes, the group has been one of the leaders of the bull since at least late-2011. And yet, while new home sales impressed, the housing, homebuilder, and home construction stocks all slumped last week, and have been lagging the market since June.
My interpretation of this discrepancy is that the market had already priced in the the first leg of this housing recovery off the 2009 and 2011 lows. As evidence, I am going to present an updated version of the same monthly XHB (ETF for the homebuilders) chart which I was noting back in the early-spring months.
That light blue horizontal line has not changed on my chart. And despite all of the impressive housing data released, you can see the $30 level continues to present overhead supply, which marked major support in 2006 before it eventually gave way and led to a crash. This has been the case for months, as major homebuilders like Lennar have weakened considerably from a technical standpoint.
Price has memory, as you can see, especially after a traumatic event like the housing bubble and crash last decade, and subsequent sharp recovery.
This may very well be a pause before the next leg higher in the housing recovery, as homebuilders and indeed entire housing-related complex eventually resume higher. But if that is going to be the case, then the ITB, ETF for the home construction stocks, will almost assuredly need to negate the weekly RSI, on the top pane of the weekly chart below, falling into bearish territory below 50. You may also argue the ETF is about to confirm a bearish head and shoulders topping pattern dating back to the early-spring.
By inference, if this chart continues to weaken and does not immediately improve (i.e..if weekly RSI fails to recapture 50), then the entire housing complex in the stock market is transitioning from leaders to laggards. Oftentimes, the market is ahead of the fundamentals and improvements in macroeconomic data points. This could easily be one of those times.
They are beaten-down here, but Into low volume bounces I would be looking at homebuilders like DHI KBH LEN TOL as short ideas.
Pay attention to what the market says, not the headlines.
Great post Chess. Thanks.
Thanks, Tom.
Thanks for the analysis and the reminder. It’s hard sometimes to step back, block out the talking heads & in-your-face headlines, and view the world objectively.
Thank you.
Look how far the price is above the 200ma. In a bull market this can be sustained. But when markets turn, watch out below
Great points, john.