Are Housing Stocks Topping Out?

• Housing economic data is finely balanced
• The long-term technicals for housing equities are also evenly matched
• The bearish short-term picture could be the domino that tips everything

Housing economic data is finely balanced

The housing industry has not exactly been on a roll since the last recession, but it has certainly experienced steady progress in the last nine years. Now though, that momentum has slowed. I am not throwing up a red flag at this point, but I think an amber one is certainly justified. That’s because any further deterioration in the housing data and housing ETF’s will cause some important chart points to give way. Remember, housing is the most interest sensitive part of the economy and, notwithstanding a near-term decline, rates are currently in a clear-cut primary bull market.

In view of the fact that the raw data are fairly jagged, Chart 1 features housing starts as a 4-month MA. The trend is very definitely a rising one, but the latest data have resulted in a drop to the up trendline. You can see that previous trendline breaks, were foreshadowed with a declining long-term KST, not unlike the present situation. That means that the current line may be in danger of a penetration.

Chart 1

Chart 2 shows another housing measure, carried by the StockCharts economic database, and that is New Homes Sold ($$HSNG1FAM). This series is also right at its cyclical up trendline and its 24-month MA. The KST has tentatively peaked. Any additional deterioration in the data will result in a trendline penetration as well as a KST sell signal. All in all, the data show that the housing industry, whilst still bullish, is nevertheless precariously balanced.

Chart 2

Chart 3 shows that in the last seventeen years or so, housing starts ($$HSNGSTARTS) and the Philadelphia Housing Index ($HGX) have moved in similar trajectories. I should add that, prior to the turn of the century, the correlation was not quite as close. Even so, the message I get from these charts, is that the housing data could be close to breaking down. If it does that would also be negative for the housing stocks, which we will now examine.

Chart 3

The long-term technicals for housing equities are also evenly matched

The principal housing ETF is the Spider Homebuilder(XHB). It is currently in an uptrend because it is above its 200-day MA and the 2011-2017 up trendline, drawn in Chart 4. However, it like the economic data is in a very fine state of technical balance as it is also just below its dashed green 2014-17 down trendline. This tight action is also reflected by the Special K, a long-term momentum indicator, which you can read about here, since it too is caught between two trendlines. The red one intersecting at zero is particularly important, because it is long and has been touched or approached on numerous occasions. This significance is enhanced because the line is also at the equilibrium level, which is a pivotal point for any momentum indicator.

Chart 4

Chart 5 also reflects the fine state of technical balance, because the long-term KST in the second window, has gone completely flat. Most significant of all, is the fact that the relative strength line in the third panel, is just above a mega support trendline. I say “mega” because it goes back to 2008 and has turned back numerous rallies and reactions. I want to emphasize that the absolute price trend of the XHB is still positive, but that the delicate technical balance suggests that it needs very close monitoring. Bearing that in mind let’s take a closer look at some short-term charts.

Chart 5

The bearish short-term picture could be the domino that tips everything

Chart 6 tells us that the XHB experienced a false upside break a few days ago. Whipsaws such as this are often followed by above average moves in the opposite direction to the whipsaw. In this case that would be down. The initial reaction was for a sharp two-day sell-off, but things have since stabilized and may continue to do so until that gap just shy of $35 is closed. The real key is to see whether the red trendline, just above $33.75 is violated, since that would also result in the flattening KST reverting to a bearish signal.

Chart 6

The other housing ETF, the iShares Home Construction ETF (ITB) also looks lower.  Chart 7 shows that it recently experienced a bearish three bar reversal as contained in the blue rectangle. This pattern consists of one wide bar following a rally, closing near its high. The next bar opens at a similar level, works its way higher, but by the close ends more or less where it started. Finally, the initial ground made up by the first bar is lost, as the price closes near the first bar’s opening. The red shading represents the cluster of two openings and two closes in the same area. In other words, a balance between buyers and sellers following the dominance by buyers. The third day, closing near the first’s opening, seals the battle in favor of the sellers. That’s the event which reverses the uptrend. The last few days have been quite quiet, which is normal after such a disruptive reversal. However, a closing of the gap at around $28 is likely, first because gaps are almost invariably closed.

Chart 7

Second, as we can see from Chart 8, the second day of the three bar reversal also represented a false upside breakout, far stronger than last July’s, which was followed by a 3-month decline. Note also that the volume was much higher this time, thereby indicating a potentially large number of trapped buyers needing to liquidate. All of this suggests that the red up trendline is in danger of violation. If so, that could well tip the balance on the longer-term charts into a bearish mode. Some hope is being held out by the rising short-term KST, but the total buyer exhaustion indicated by the sharp rally, exhaustion breakout and high volume suggest otherwise.

Chart 8

That's why we need to watch Chart 9 very carefully!!

Chart 9

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.