Monday, December 30, 2013

The homebuilding sector continues to look upbeat

The homebuilding sector continues to experience a gradual recovery off the historic collapse of 2005-2009. New and existing homes sales have been steadily trending up since 2011, housing inventory has been steadily trending down since 2008, and home prices have been rising since early 2012. For the most part, industry data has been universally heading in the right direction, creating a bullish backdrop for housing equities. 

Not surprisingly, home building stocks have indeed responded to the good news with equity prices well above the lows of early 2009.


Whereas much of the industry data bottomed in 2011-2012, the chart above of ITB (iShares US Home Construction ETF) shows equities bottoming at least two years ahead of the oft-quoted industry numbers. Many times on this blog I've written how stocks tend to lead, whether it be commodities, news or economic data. In fact, in early September I wrote about housing stocks climbing higher several months before the low was established for home prices. For what it's worth, since that blog post the ITB is up 14% compared to the S&P 500 rising by 9% in that time. 

I'd like to point out a few things in the ITB chart. First, as already mentioned, home builder stocks put in their final lows in 1Q2009, but note in 2011 another significant higher low was established creating what can be regarded as a double-bottom. Encapsulating this double-bottom formation is a larger, more massive cup-with-handle formation -- typically a very reliable bullish pattern. Finally, after spending several months at an elevated level, the MACD pulled back to below zero only to turn up and trigger a recent Buy signal.

In addition to housing data and equities heading north, it's both understandable and encouraging to see lumber likewise enjoying a longer-term recovery. 

Lumber prices have steadily risen since the lows of 2009, advancing within a very well-defined, multi-year channel. I would mention that COT interest is shown in the lower inset and despite lumber rallying from 300 to it's current level of about 375, the generally smarter crowd, commercial hedgers, remain conspicuously neutral on the commodity. Note in the past the green line has tended to decline when lumber has rallied, indicating commercial hedgers getting short, and yet that has not occurred with this recent 25% rally inferring that lumber likely has more room to run. 

Below is a chart of the Case-Shiller Home Price Index and I thought it would be interesting to view the Index as if it was a stock, including a few indicators. 

The Index itself established a double-bottom comprised of early 2009 and the end of 2011. Note the second bottom for the Index was a lower low compared to housing equites (ITB), which made a higher low in mid-2011. As reflected by this Index, home prices have been trending higher for nearly two years. 

For the entire history of the Case-Shiller Index, both the MACD and RSI indicators have flashed just two signals, a Sell and a Buy (actually three, both indicators were in Buy mode when the Index was launched). The MACD has tended to be a bit premature in its signals, registering a Sell in 2006 and a Buy in 2009, but in either case it certainly got you on the right side of the more macro trend to follow. The RSI did a better job of timing, crossing down through the 50 level in 2007 (Sell) and rising up through 50 in 2012 (Buy). Granted, with this Index we're dealing with monthly data meaning the sample size of data is limited, but the larger point was to show that home prices remain in a solid uptrend with at least two well-known technical indicators supporting the bullish case. 

With Fed tapering on the horizon, it will be interesting to see how housing stocks fare with presumably higher interest rates in store. However, Bernanke made clear that exceptionally low interest rates will continue to be the Fed's goal and policy for the foreseeable future. Regardless, housing equities will almost certainly give us plenty of lead time to act if and when the industry climate changes to more bearish.

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