HOUSING STARTS AND BUILDING PERMITS PLUNGE -- HOME CONSTRUCTION ETF HOLD THE GAP TO WARD OFF BEARISH PATTERN -- KEY BREADTH INDICATORS SURGE TO NEW HIGHS -- HIGH-LOW LINE HAS BEEN RISING SINCE LATE NOVEMBER -- RUSSELL 2000 OUT PACES S&P 100 WITH NEW HIGH
HOUSING STARTS AND BUILDING PERMITS PLUNGE... Link for today's video. The Commerce Department reported that June housing starts plunged almost 10% to 836,000 and building permits fell over 6% to 911,000. Chart 1 shows Housing Starts ($$HSNGSTARTS) sinking to their lowest level in over six months. The indicator has been rather volatile in 2013 with several big swings the last six months. At this point, I am not quite ready to give up on the uptrend in housing starts. A print below 830,000, however, would suggest that the two-plus year uptrend is reversing and this would be a negative for housing stocks. I am also holding off because building permits remained above 900K and above their 2013 low (chart 2). The trouble would start when/if building permits break down. Keep in mind that building permits lead housing starts because one needs a permit before actually breaking ground. Note that these charts were created with a user-defined index using a StockCharts PRO account.
(click to view a live version of this chart)
Chart 1
Chart 2
HOME CONSTRUCTION ETF HOLD THE GAP TO WARD OFF BEARISH PATTERN... Despite a plunge in housing starts and building permits, the Home Construction iShares (ITB) is holding up in early trading on Wednesday. Perhaps housing stocks and the market are hanging on Chairman Bernanke's every syllable. Chart 3 shows the Home Construction iShares (ITB) with a potential head-and-shoulders pattern in 2013. "Potential" is the key word because the pattern is far from confirmed. Most recently, the ETF surged off support with a gap last week and that gap is holding. This gap is bullish until proven otherwise with a fill. Moreover, it would take a move below 22.5 to fill the gap and increase the chances that a right shoulder is indeed forming. Further weakness with a break below the 2013 lows would confirm the head-and-shoulders reversal pattern. The indicator window shows the price relative breaking support in June and remaining below this support break. ITB is underperforming the market this year and relative weakness is a concern going forward. Chart 4 shows the long-term chart with key support marked at 21.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
KEY BREADTH INDICATORS SURGE TO NEW HIGHS... New highs in the S&P 1500 AD Line ($SUPADP) and S&P 1500 AD Volume Line ($SUPUDP) reflect broad strength in the stock market. Even though the S&P 1500 is short-term overbought, major tops are unusual when both of these indicators hit new highs. Multi-month bearish divergences in one or both of these indicators often form when the market tops or moves into a large trading range. A bearish divergence forms when the underlying index moves to a new high, but the indicator fails to confirm with a new high of its own. A bearish divergence in the AD Line would suggest that fewer stocks were participating in the advance. In other words, the rally was narrowing. In the absence of a bearish divergence, chartists must conclude that the majority of stocks are participating in the advance and this supports the overall uptrend.
(click to view a live version of this chart)
Chart 5
Chart 5 shows the S&P 1500 AD Line ($SUPADP) moving well above its May high this month. In fact, the AD Line is outpacing the S&P 1500 because it is still trading near its May high. The lower indicator window shows the 20-day SMA of Advance-Decline Percent (advances less declines divided by total issues). After spending a couple weeks in negative territory, the indicator turned positive again on 2-July and remains bullish as long as it stays positive. This indicator acts as a momentum oscillator because it oscillates above/below the zero line. Dips to the zero line or below occur when the AD Line pulls back or consolidates. A subsequent cross back into positive territory means the AD Line has turned back up and the uptrend is resuming. Chart 6 shows the S&P 1500 AD Volume Line ($SUPUDP) with similar characteristics.
(click to view a live version of this chart)
Chart 6
HIGH-LOW LINE HAS BEEN RISING SINCE LATE NOVEMBER... Chart 7 shows the S&P 1500 High-Low Line ($SUPHLP) moving above its 10-day EMA in late November and remaining above this moving average for over seven months. Despite its lag, this indicator has defined the uptrend in the stock market quite well. High-Low Percent , which equals new highs minus new lows divided by total issues, is a lagging indicator because it takes at least 52-weeks for a stock to forge a new high or new low. High-Low Percent works well in strong trends and we have certainly seen a strong uptrend since November. The indicator window shows High-Low Percent with horizontal lines at 2 and -2 percent. The red arrows show dips below 2% in late December, late February, mid April, late May and June. Even though there were brief forays into negative territory in mid April and mid June, the indicator never dipped below -2% and the larger uptrend subsequently resumed. It would take a move below -2% to signal a noteworthy expansion of new lows, which is what occurred in mid November.
(click to view a live version of this chart)
Chart 7
RUSSELL 2000 OUT PACES S&P 100 WITH NEW HIGH... There are also signs of broad market strength because small-caps are outperforming large-caps. Chart 8 shows the Russell 2000 ($RUT) surging to a new high with a move above 1020 this month. Even though this key small-cap index is short-term overbought after a 10% surge in three weeks, the bigger trend is clearly up with series of rising peaks and troughs this year. The indicator window shows the Russell 2000 relative to the S&P 100 ($OEX) using the price relative ($RUT:$OEX ratio). The red dotted line shows this ratio breaking down in early April as small-caps started to lag large-caps. This period of relative weakness was brief as the ratio turned up and broke resistance in early May. The ratio hit a new high this month as small-caps led large-caps.
(click to view a live version of this chart)
Chart 8
S&P 100 STALLS AT MAY HIGH... Chart 9 shows the S&P 100 stalling near its May high the last few days. I am hesitant to call this major resistance because the bigger trend is up and the breadth indicators are trading at new highs. In addition, $OEX is entitled to a few days of rest after a surge from 703 to 753 (6.5%). Some sort of sharp decline is needed before we can consider this resistance and raise the specter of a double top.
