Too many to count have prognosticated about the end of the real estate bear market in the US. With the danger of being yet another dubious addition to that list, I think there just might be a ray of sunshine breaking through the clouds for US housing.
The reasons for a deeper and prolonged price decline or at least a moribund sideways range are well known. Rather than get bogged down in such fundamental analysis which ends up being simply rear view mirror driving, here is an attempt from technical analysis to peer at the hard right edge of the chart.
The first is using the futures price of lumber as a leading indicator for the housing sector. The chart is courtesy of McClellan Financial and compares the Philadelphia Housing Sector (HGX) index with the price of lumber, shifted ahead by one year:
Source: McClellan Financial
The two tend to mirror each other in direction of trend, if not magnitude of each move. Two caveats I have to point out are that the chart of HGX is graphed using arithmetic scaling instead of logarithmic scaling so the downtrend line appears to be broken to the upside. If we look at the logarithmic scale, that is not the case. At least yet.
And the other is that the spike up in lumber prices that occurred in April 2010 was due to the earthquake in Chile. So we can’t attribute the price rise to a ‘normal’ increase in demand and neither can we expect there to be a commensurate reaction from the housing sector. But even if we remove that initial spike from the equation, the price of lumber has risen significantly.
Turning to the housing stocks, as Michael Kahn of Barron’s recently points out, things are not looking half bad. Also, stocks on the periphery of the housing sector, such as Masco (MAS), a component of the SPDR Homebuilders ETF (XHB) with a weighing of 3.63% have surprisingly strong charts:
Most of the builders like Hovnian (HOV), DR Horton (DHI), Lennar (LEN), etc. seem to be methodically building large bases that are not yet complete. Many of them even have the hint of a reverse head and shoulder formation – the classic bottoming pattern. A good example is Lennar (LEN) with a neckline around $21.
But I think it is still too early to jump in but the first glimmers of hope are visible. Right now the general market risk is too great for a correction. If or when that arrives, it will no doubt also drag down housing stocks along with the rest of the market. Especially since the sector is overbought, much like almost everything else out there. The percentage of components of the Philadelphia Housing Sector (HGX) trading above their 10 day moving average is 94% and those trading above their 50 day moving average 100%. The long term breadth is a little bit less overextended with just 72% of issues trading above their 200 day moving average.
So the most we can say at the moment is that this sector looks like it is losing the deathly pallor it had throughout the past few years. And it once again deserves to be put back on our watch lists as it finishes building a base. Students of technical analysis familiar with Weinstein’s stage analysis would recognize this as “Stage 1”. In case you’re not familiar with Stan Weinstein, I can’t recommend his book highly enough. It is a must have for any serious student of the market.