HOMEBUILDERS WEIGH ON MARKET -- HOUSING INDEX LOOKS TOPPY

HOMEBUILDERS CONTINUE TO FALL ... I've written before about the fact that homebuilders (and REITs) were among the market's worst performers during August. That trend continued again today. But this time there was some tangible evidence that the housing boom might finally be slowing. July home resales dropped more than economists expected. The number of homes being offered for sale reached the highest level in seventeen years. That means the level of supply is rising. At some point near the end of every market boom, supply starts to exceed demand and prices start to fall. It's happened to every other market bubble in history including real estate. I can't say for sure that it's happening again, but there are enough signs to warrant some caution. Homebuilders were among the day's worst performers. The daily bars in Chart 1 show the PHLX Housing Index (HGX) falling to the lowest level in two months. It's been trading under the 50-day average for the past couple of weeks. The HGX/SPX relative strength ratio (top of chart) shows housing underperformance during August. The daily MACD lines are decidedly negative. The HGX has reached the first level of potential support at its March peak near 520. A rebound off the March peak might help the short-term trend. If it doesn't, a more important test could take place at its 200-day line. Unfortunately, the long-term trend is also weakening.

Chart 1

WEEKLY MACD LINES TURN DOWN ... Any test of the 200-day average would take on major importance. The reason why is shown in Chart 2. It's a weekly bar chart of the Housing Index going back two years. The red line is the 40-week moving average which is the equivalent of the 200-day line. As the chart shows, the red line has done an excellent job of containing corrections in the housing bull market. It's important the the HGX stay over that long-term support line. What has me more concerned right now is the fact that the weekly MACD lines have turned negative for the second time this year. One downturn is a warning. A second downturn from the same level is usually more serious. That's because the failure of the MACD lines to achieve a new high creates a "negative divergence". Virtually every other weekly indicator that I've looked at shows a similar divergence. That means that the current downturn in housing stocks could be a lot more serious. That's starting to worry the market and for good reason. Housing has helped keep the economy going. The housing boom has also provided much of consumer buying power during the cyclical bull market in stocks that started almost three years ago. With the cyclical bull market looking old and tired, and given negative seasonal trends starting this month, the market can't afford to lose its housing support.

Chart 2