HOMEBUILDERS WEIGH ON MARKET -- HOUSING INDEX PEAKED IN JULY -- DOUBLE TOP IN BOND PRICES SIGNALS END OF FIVE-YEAR HOUSING BOOM
HOMEBUILDERS PEAKED IN JULY ... A negative forecast from Toll Brothers that housing demand was weakening pushed that stock and other homebuilders sharply lower today. In turn, that caused some profit-taking in the broader market. The idea that the housing sector might be peaking isn't new. If you go to the Murphy Market Messages Index and type "housing" into the search box, you'll find no less than ten bearish references since August 25 on the housing sector. Chart 1 shows why. The PHLX Housing Index (HGX) peaked at the end of July and has been tumbling since then. The HGX broke its 200-day average at the start of October (red arrow) and is now meeting resistance at that former support line (red circle). Today's gap down also shows that the HGX is meeting chart resistance at its late August/ late September low (see line). What's equally troubling is the peak in the relative strength ratio of the housing group. Since the start of August, housing has become the weakest part of the stock market. [John's Latest Performance Chart shows that housing was October's weakest group]. Longer-term charts are also giving bearish warnings.
Chart 1
WEEKLY SIGNALS ARE NEGATIVE ... Chart 2 shows the rising housing trend over the last three years. At present, the Housing Index is threatening the rising trendline drawn under the 2003-2004 lows. Notice, however, the serious deterioration in the two adjoining weekly indicators. The 12-week Rate of Change (ROC) line on the top has fallen to the lowest level in three years. The weekly MACD histogram below the chart has done the same. That hints at the current downturn being more than a normal correction. The weekly indicators suggest that housing may be putting in a major peak. The monthly chart is giving the same warning.
Chart 2
PHM MONTHLY CHART LOOKS TOPPY ... Since the Housing Index itself has a limited history (three years), it's necessary to go to the charts of individual homebuilders to study monthly price charts. All of them look pretty much alike. I've chosen Pulte Homes (PHM) because it's the biggest U.S. homebuilder. But the chart signals are pretty symptomatic of all the big homebuilders. The monthly bars are plotted on a log (percentage) chart which is more useful for studying long-term trends. The rising trendline starting in 2000 (when the latest housing boom started) is still intact. The pink trendline, however, drawn from the late 2002 bottom has already been broken. The monthly MACD lines (top of chart) are turning negative for the first time since the spring of 2003. That bearish trend can be seen more closely on the MACD histogram bars (below chart). If this signal carries through the balance of November, it will the first major sell signal in the housing group in two and half years. [Notice also that the histogram bars peaked at the same levels in early 2004 and mid-2005. That's a much earlier sign of a possible market top].
Chart 3
IT'S ALL ABOUT INTEREST RATES ... In past articles, I've shown the close inverse correlation between housing stocks and bond "yields". Today I'm going to turn it around to make the picture even clearer. Chart 4 compares Toll Brothers (monthly bars) to the "price" of U.S. Treasury bonds (green line). Since homebuilders move in the opposite direction of bond "yields", they move in the same direction of bond "prices". Notice that bond prices and Toll Brothers have been trending together over the last ten years. There are two major turning points on the chart. The first was at the start of 2000 when an explosion in bond prices (a drop in bond yields) coincided with the start of the latest boom in homebuilding stocks (green circle). The second turning point took place in mid-2005 (red circle) when bond prices peaked at the same level as they did in the spring of 2004 (red arrow). That "double top" appears to be signaling the end of the five-year rally in bond prices (a bottom in bond yields) and, along with it, the likely end of the five-year boom in housing stocks.
Chart 4
