Is Housing Headed Towards The Basement?

• Housing and housing stocks are vulnerable
• Equal weight ETF’s are becoming less equal
• Gold short-term vulnerable

Housing and housing stocks are vulnerable

New data for residential new single family home sales ($$HSNG1FAM) was released this morning and it is starting to look a little shaky. Chart 1 does not include that update, so I have placed an arrow approximately at  571,000, which is where July’s number was reported. The latest data is below the 12-month MA at 592,000, but literally right at the business cycle up trendline. Any further weakness will obviously cause a rupture, which would suggest that housing had peaked for the cycle. Please not that I am referring to housing starts as opposed to housing prices. The KST in the lower window is already in a bearish mode below its MA. Working on the assumption that markets look ahead, I checked to see whether the housing stocks are providing signs of weakness as well. Indeed they are.

Chart 1

In this respect, Chart 2 features the SPDR S&P Homebuilders ETF, the XHB, together with a short-term KST, its relative line to the S&P and the daily KST for relative action. Here we can see that the up trend line dating back to March has recently been violated. In addition, the relative strength has completed a top. Note the large negative divergence between the price and the RS line as flagged by the dashed red arrows. This suggests a longer-term deterioration in relative action, especially as the RS line is below its 200-day MA. The XHB itself has not yet signalled a bear market because it remains above its 200-day MA. Also, the price has yet to trace out a series of declining peaks and troughs.  That probably means that if the XHB has begun a primary bear market, we are likely to see some failed rally attempts at the 2017 high prior to any serious downdraft.

Chart 2

Chart 3, features the iShares US Construction ETF, the ITB. It too has recently suffered an absolute and relative trend line violation, but both series remain above their respective 200-day MA’s. The negative divergence between the price and the relative line is not so obvious as is the case with the XHB. However, there can be no mistaking the fact that the RS line has completed an upward sloping head and shoulders top.

My take from all this, is that housing stocks are likely to extend their period of under-performance for the foreseeable future. Further backing and filling is likely before they suffer any major damage on the downside.

Chart 3

Equal weight ETF’s are becoming less equal

In doing a recent survey of some key relationships, I ran across Chart 4, featuring the ratio between the S&P Equal Weight Index ($SPXEW) and the S&P 500 ($SPX) itself. The S&P is weighted by capitalization whereas the equal weight series gives each component the same weight. Equal weighting is therefore a way of reflecting what the broad market is doing as opposed to the S&P, which can be distorted by large price moves in higher capitalized stocks.

What struck me with the chart, was the fact that the ratio has just completed a seven year top and is also trading below its 12-month MA. The KST that monitors long-term trends is also in a bearish mode. If valid, and there are few grounds for expecting otherwise, this break implies that those relying on cap based indexes are likely to out- perform indexes based on the broader market.

Chart 4

Gold short-term vulnerable

At the end of July I posed the question as to whether gold had the potential to experience a major rally. My conclusion was that the technical position was very constructive, but that we needed to see some major breakout before finally joining the bullish camp. In the intervening period, we have seen the price of the yellow metal advance, but that upside breakout has been quite elusive. Chart 5 shows that the price of the SPDR Gold Trust, the GLD, did experience a breakout of sorts as the price opened above the green resistance trend line, but by the end of the day closed back below it. This kind of action indicates short-term exhaustion and resulted in a false break. That suggests some weakness or consolidation through the end of the month. If it can overcome this problem by rallying and holding above the August intraday high just below $129, that would be a very positive sign. However, you can see that the KST, while still bullish, is moderately overextended. Consequently, if the bearish action indicated by the exhaustion day materializes it would greatly enhance the danger of a KST sell signal and red up trend line violation. It’s still a very finely balanced situation that could fall in either direction in my view.

Chart 5

Sometimes we get a clue as to future action by looking at the Van Eck Vectors Gold Miners ETF, the GDX. Here we see another false breakout as the price totally engulfed the previous day’s trading for a candlestick engulfing pattern. That action also represented a bearish outside day using western bar charts, a short-term bearish double whammy. It was emphasized by the fact that this was a breakout from a reverse head and shoulder formation. Once again, if the price can rally above the intraday high for the recent up move and hold there, the current short-term bearish undertones would be canceled. However, if instead, it drops below the red up trendline, say under $22.75, and holds there, we would see a bearish KST and likely lower prices.

Chart 6

Finally, Chart 7 compares the ratio between gold and gold shares to the gold price itself. Generally speaking, when the shares are out-performing the metal it is bullish for the metal, and vice versa. Right now, that ratio is extremely finely balanced. You can also appreciate that fact from the almost horizontal recent action in the KST. The chart offers the perception that something important could well happen in the period ahead, so stay tuned. Incidentally you can update this chart by simply clicking on it. Better still by saving it in a chart list.

Chart 7

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.