HOUSING BREAKOUT CONTINUES TO BUILD ON IMPROVING FUNDAMENTALS -- LENNAR AND NVR ARE GROUP LEADERS -- OTHER PROMISING HOMEBUILDING CHARTS BELONG TO DHI, MDC, PHM AND TOLL BROTHERS -- MARKET EXTENDS SUMMER RALLY BUT IS ON SHAKY TECHNICAL GROUND

MORE GOOD HOUSING NEWS BOOSTS HOMEBUILDERS... Each passing week brings more encouraging news on housing. Today's second quarter news shows home prices in the U.S. jumping for the first time in three years. As is usually the case, that good news has been anticipated by stocks tied to housing -- especially homebuilders. Last week, I showed the Dow Jones U.S. Home Construction iShares (ITB) having completed a bullish "head and shoulders" bottom. Today's good news has pushed that homebuilding index to the highest level in ten months. Also impressive is the fact that the ITB/SPX ratio (below chart) is on the verge of a bullish breakout. That means that homebuilders are showing absolute and relative strength, which is a strong combination. For the first time in four years, homebuilders are actually helping lead the rest of the market higher. During the last week of July, I showed a number of homebuilders that were leading the advance. Let's revisit them and add a few more that are either breaking out or close to doing so.

Chart 1

LENNAR AND NVR LEAD HOMEBUILDING RALLY... These two homebuilding leaders were featured in my July 27 Market Message ("STRONG HOUSING DATE BOOSTS HOMEBUILDERS WHICH APPEAR TO HAVE BOTTOMED"). As you can see, both are doing very well. NVR has hit a new 52-week high and is challenging its April 2008 peak. Its relative strength line is even stronger. Chart 2 shows Lennar moving up to challenge its high reached last September just over 16. Its relative strength line has done the same. Lennar has been one of the five top performers in the Consumer Discretionary SPDR (XLY) over the last week and month. There are several other homebuilders with promising chart patterns as well.

Chart 2

Chart 3

MORE HOMEBUILDING LEADERS... The next four homebuilders (shown in order of 2009 relative strength) show promising chart patterns. The strongest of the group is DR Horton which is challenging its April high (Chart 4). The other three are just now in the process of breaking out to the upside. They include MDC Holdings (Chart 5), Pulte Homes (Chart 6), and Toll Brothers (Chart 7). One of the reasons I keep coming back to homebuilders is because I believe they represent one of the best values in the stock market. Strong buying in the group has also helped extend the market's summer rally.

Chart 4

Chart 5

Chart 6

Chart 7

SUMMER UPTREND ON WEAK FOOTING... All three major stock indexes have exceeded their August highs to extend their summer rally. Unfortunately, short-term momentum measures show the recent bounce to be on shaky technical ground. Chart 8 shows the 14-day RSI line failing to confirm the recent Dow breakout; Chart 9 shows the 12-day Rate of Change (ROC) line acting much weaker than the S&P 500; Chart 10 shows daily MACD lines for the Nasdaq Composite still in negative territory. Given continuing overbought readings in market sentiment indicators (and the approach of a dangerous seasonal period), I continue to advocate caution at current levels. As I wrote last Friday, however, prices have to drop below last week's lows to signal the start of any market correction. Those levels are 9116 for the Dow, 978 for the S&P 500, and 1929 for the Nasdaq. [Editor's Note: Arthur Hill is on vacation this week].

Chart 8

Chart 9

Chart 10