Housing stocks, and another example of price leading the news

Recently the S&P 500 Index has put together a nice rally, appreciating by a bit over 3% since the August 27th low of 1630. Not to be outdone, housing stocks have performed even better with the iShares U.S. Home Construction ETF (ITB) rising 5% in that time.

As shown in the daily chart below, the ITB is enjoying a classic oversold pop.

Source: Stockcharts.com

Needless to say, housing stocks have been on a tear as the ITB has more than doubled since late 2011. A Golden Cross occurred in January 2012 (green circle) signaling that the race was officially on. 

However, grey clouds started to appear earlier this year. The ITB continued to make higher highs into May, but the relative price (upper inset) did not and instead remained flat for months -- a bearish divergence. Eventually the ETF gapped down in June on high volume and breached the 200-day MA. The ITB has since made several attempts to rally through its 50-day MA, but what was once support through 2012 into 2013, this key MA has become resistance. Price has been unable to successfully break through the 50-day MA as volume has picked up during this unfolding downtrend. A Death Cross occurred last month (red circle), further confirming a trend change. A few other bearish indications include the MACD remaining below zero and the RSI constrained within a depressed 30-60 range during the last few months.

The rising trend for housing stocks has clearly been broken and it appears a new declining trend has taken hold. That said I wouldn't be surprised to see this oversold rally get extended as prior high-flyers frequently do not die a sudden death, with many an investor believing this is their chance to opportunistically enter on the cheap. But again, the ITB is currently meeting up against its 50-day MA which has proven to be firm resistance of late.

On a related but separate note, I've written in the past about the frequent tendency for prices to lead or discount eventual news or released data. In my mind, it's a strong argument in favor of technical analysis or at minimum it suggests one should respect the potential implications of price action. The following chart shows the S&P/Case-Shiller Composite Home Price Index (red line) and the S&P 500 Homebuilding Index (blue line).

Source: Bloomberg

I'm not sure if it gets any more stark than this. In 2005, the homebuilder equities peaked about one year prior to Case-Shiller peaking in 2006. More recently, the equities put in their final bottom in September 2011 whereas Case-Shiller put in its final bottom on March 2012, or six months later. In fact, from September 2011 to March 2012, the homebuilder equities soared by +92%, a whopping gain prior to the Case-Shiller final bottom.

Also, note the pattern of the two lines over time, very similar -- except the equities lead by 6-12 months. And it's generally what most technicians say with regards to price discounting, that the market (stock prices) tends to discount recessions 6-12 months ahead of time, etc.

Not convincing? I will continue to periodically highlight more such examples in the future. Trust me, the sample size is quite large.