HOUSING STARTS AND BUILDING PERMITS SURGE -- SCTR CLEARS KEY LEVEL FOR THE HOME CONSTRUCTION ISHARES -- LENNAR AND TOLL BROTHERS CHALLENGE SUMMER HIGHS -- USG FIRMS IN KEY RETRACEMENT ZONE -- TREASURIES GET A BAND SQUEEZE AS FED CHANGES DIRECTION

HOUSING STARTS AND BUILDING PERMITS HIT MULTI-YEAR HIGHS... Link for today's video. Data from the St Louis Fed database (FRED) shows Housing Starts (HOUST) and Building Permits (PERMIT) surging in the fourth quarter and hitting multi-year highs. Chart 1 shows Housing Starts moving to its highest level since the first quarter of 2008, almost five years ago. Notice that starts surged over 10% from month-to-month and this is the biggest gain in a long long time. A new high in Housing Starts is bullish for homebuilders, related industries and the economy as a whole. Chart 2 shows Building Permits, which is a leading indicator for Housing Starts, hitting its highest level since mid 2008. The uptrend is steady and this bodes well for future housing starts.

Chart 1

Chart 2

SCTR CLEARS KEY LEVEL FOR THE HOME CONSTRUCTION ISHARES ... Positive housing data helped the Home Construction iShares (ITB) to a big gain on Wednesday and its StockCharts Technical Rank (SCTR) broke above 50 for the first time since July. Chart 3 shows ITB surging in September and then consolidating the last three months. Notice the relatively equal highs and the rising lows? While not picture perfect, this pattern has the look and feel of an ascending triangle, which is a bullish continuation pattern. The rising lows show buying pressure coming in at higher levels. The equal highs show overhead supply at specific level. A break above the Sep-Nov highs would by a vitory for buying pressure and signal a continuation higher. The height of the pattern is added to the breakout for an upside target.

(click to view a live version of this chart)
Chart 3

The indicator window shows the StockCharts Technical Rank (SCTR) moving above 50 and breaking resistance that extends back to early August. The SCTR was turned back in the 40-50 zone at least six times in the last five months. The break above 50 puts ITB in the top half of our ETF universe for relative performance. Keep in mind that the SCTR universe does not include leveraged or inverse ETFs. ITB is now starting to show relative strength again and this increases the odds of a breakout. Turning back to the price chart, I would mark key support at 22. Chart 4 shows weekly candlesticks with MACD moving into positive territory this month. Chartists can read more about the SCTR in our ChartSchool article

(click to view a live version of this chart)
Chart 4

LENNAR AND TOLL BROTHERS CHALLENGE SUMMER HIGHS... Lennar and Toll Brothers are outperforming most other homebuilding stocks because they are the first to challenge their summer highs. Chart 5 shows Lennar (LEN) breaking out in September and then moving into an extended trading range. The stock held above the Aug-Sep low in November and this shows diminished selling pressure. We have yet to see a significant surge in buying pressure because the stock remains short of breakout. The stock is making a go at resistance this week and a breakout would target a move to the May high. Chart 6 shows Toll Brothers (TOL) with similar characteristics.

(click to view a live version of this chart)
Chart 5

(click to view a live version of this chart)
Chart 6

USG FIRMS IN KEY RETRACEMENT ZONE... I also have my eye on USG Corp (USG) because this company will benefit from strength in housing. USG manufactures gypsum related products and other building materials for the construction industry. Chart 7 shows USG with a nice surge in September and then an extended correction the last two and a half months. While the S&P 500 moved to new highs, this stock retreated from its highs and fell along with housing-related stocks. The immediate trend is still down, but this decline looks corrective and USG just hit a key level. Yes, the falling channel retraced 62% of the prior advance and the stock is firming. Admittedly, the two to three week consolidation could be a bear pennant and a break below 25 would be bearish. On the flip-side, a breakout at 26.5 would provide the first sign of strength and a follow through breakout at 27.5 would reverse the immediate downtrend. The indicator window shows the stock relative to the S&P 500. A break above the mid November highs is needed to put this stock back on the relative strength track.

(click to view a live version of this chart)
Chart 7

TREASURIES GET A BAND SQUEEZE AS FED CHANGES DIRECTION... The Fed took a baby step this week by reducing its quantitative easing program by a mere $10 billion. Instead of $85 billion, the Fed will now purchase $75 billion worth of Treasuries ($40 billion) and mortgage backed securities ($35 billion). Despite this seemingly insignificant step, history suggests that Fed policy changes are both gradual and sustained. In other words, Fed policy trends and changes often last more than a year. Chart 8 shows the 20+ YR Treasury Bond ETF (TLT) in a long-term downtrend. The early November breakdown around 105 provided the most recent bearish signal. TLT fell to the August-September lows in November and then consolidated the last few weeks. In fact, trading has turned downright dull as Bollinger Bands narrowed and Bandwidth dipped to its lowest level of the year. Also notice that Aroon Up and Aroon Down are both below 30. These three indicators point to a directionless market over the last 3-4 weeks. With the long-term trend down, the bias remains bearish and chartists should watch the Bollinger Band levels for the next directional clue. A break below 102 would signal another continuation lower, while a break above the upper band would argue for a counter-trend bounce. For the Aroons, the first to surge above 50 will win the directional battle. You can read more about the Aroon brothers in our ChartSchool article

(click to view a live version of this chart)
Chart 8

(click to view a live version of this chart)
Chart 9

Before getting any ideas about a bounce in bonds, note that the 10-YR Treasury Yield ($TNX) is trending higher and poised to challenge the September highs near 3%. The last bullish signals occurred when $TNX broke wedge resistance and Aroon Up first surged to 100 in early November. Remember, yields and Treasury bond prices move in opposite directions. Even though $TNX may seem near resistance, both the long-term and short-term trends are up. This means resistance is only potential and not expected to hold. $TNX has risen from 2.5% to 3% over the last nine weeks and may be short-term overbought, but it is by no means weak.