STRONG HOUSING DATA BOOSTS HOMEBUILDERS WHICH APPEAR TO HAVE BOTTOMED -- SOME HOMEBUILDING LEADERS -- TRADING THE XHB FOR A HOUSING-RELATED RECOVERY THAT INCLUDES MORE THAN HOMEBUILDERS
HOMEBUILDERS RALLY... New home sales in the U.S. climbed 11% last month which is the biggest gain in eight years. Following that report, homebuilding stocks are trading higher. Judging from today's first chart, however, it appears that the market has been anticipating that good news for months. Chart 1 shows the PHLX Housing Index (HGX) moving sideways since last November in an apparent bottoming formation. Today's 3% gain puts the HGX at the highest level in more than two months and in position to challenge its early May peak. A close over that level would confirm that the group has bottomed. The HGX is trading well above its 200-day moving average and recently experienced a bullish "golden cross" (when its 50-day ma exceeded its 200-day). The HGX/SPX relative strength ratio below the chart also appears to have started bottoming last November. Its longer-range chart also supports a bottom having been made.
Chart 1
WEEKLY RESISTANCE LINES ARE BROKEN... The weekly bars in Chart 2 show the decline in homebuilding stocks since early 2007. The chart shows that a resistance line drawn over the 2007/2008 low has been broken on the upside. That's another technical sign that the bear market in housing has probably ended. The fact that homebuilders have shown relative strength all year is another plus. Chart 3 shows the HGX/SPX ratio trading sideways for most of the last year (see box). It has broken a resistance line extending all the way back to the start of 2006. A period of sideways action normally follows the end of a bear market and precedes the start of a new bull market. Both charts suggest that homebuilders have been moving sideways since the fourth quarter of last year in a bottoming formation and may even be in the early stages of a new uptrend.
Chart 2
Chart 3
MONTHLY CHARTS ALSO SUGGEST A HOUSING BOTTOM ... The most important chart of all is the monthly chart because that's the one that determines the major trend of the homebuilding group. And the chart readings there are positive as well. Chart 4 overlays the 14-month RSI on monthly HGX bars. An overbought reading (over 70) in early 2005 led to the housing peak. An oversold reading (below 30) at the start of 2009 appears to be signalling a housing bottom. The monthly RSI line (which measures momentum and usually leads price) has risen to the highest level in two years and has broken a four-year resistance line. Chart 5 shows monthly MACD lines turning positive for the first time since 2005. All of those charts suggest that the worst is over and that housing has better days to come.
Chart 4
Chart 5
HOMEBUILDING LEADERS ... Although all of the individual homebuilders appear to be bottoming, some may have already started new uptrends as shown below. Chart 6 shows Lennar breaking out to to a new 2009 high. Its relative strength line is close to doing the same. Chart 7 shows Meritage Homes testing its spring high. Chart 8 shows NVR having broken a two-year resistance line. The simplest way to buy the entire housing group is through an exchange traded fund like the XHB.
Chart 6
Chart 7
Chart 8
HOMEBUILDING SPDR NEARS 2009 HIGH ... Unless someone is a very good stock picker, I generally recommend using an exchange traded fund to participate in a promising stock group. In this case, that would be the S&P Homebuilders SPDR (XHB) which is shown in Chart 9. The XHB appears to have bottomed during the October/March period and is moving up to challenge its May 2009 high. Its RS line (below chart) is starting to rally as well. Be aware, however, that the XHB is not a pure homebuilding ETF. In addition to homebulders, it also includes several housing-related stocks that would also be expected to participate in housing recovery. In fact, it's biggest holding is Universal Forest Products (Chart 10) which has just hit a new 52-week high. The XHB also includes stocks like Owens Corning, Bed Bath & Beyond, Masco, Mohawk Industries, Williams Sonoma, Lowes, and Home Depot. That makes the XHB more of a housing-related ETF than a pure homebuilding play. Even with that caveat, however, a glance at most of those individual stock charts reveals a lot of bottoms being made -- like those in Charts 11 and 12 belonging to Masco (building materials) and Mohawk Industries (carpeting).
Chart 9
Chart 10
Chart 11
Chart 12
