Are Homebuilder Stocks Ready for Take Off?

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This week saw some mixed data come out concerning housing in America.

First, on Monday, August 19 courtesy of Investor's Business Daily, the headline read "Single-Family Starts Hit 8-Month Low as Interest Rates Jump", an apparently bearish housing development.

However, just one day later that same publication's headline read, "All-Cash Home Bids Continue Strong as Prices Head Up".  This is in addition to Home Depot's ( HD ) earnings beat and full year guidance raise.  This now all seems bullish.  So which is it, a negative housing market or a positive one?

This is why trading or investing on the news just doesn't work.  The exact same bearish or negative news on one day will be spun as bullish, the very next day. We prefer a more objective, less conflicted, and proven approach at ETFguide.

The Real Housing Barometers

Listening to "expert" opinions from biased real estate brokers or trusting data from a construction company CEO that has a vested interest not to "rock the bullish boat" likely won't get you very far in your investments.  Most of these "expert" opinions are just coincidental with the rising markets anyways and should be viewed in a more contrarian than factual light.

WATCH: State of the Housing Market, according to Lumber

If their advice is indeed just coincidental to the markets, then it makes sense to just go straight to the source, to the markets.

We feel that the stock market is indeed the one true leading indicator and that market prices matter more than opinions of experts.  Experts can talk all they want about the bullish housing recovery, but the markets themselves are now warning us with bearish undertones. 

Lumber Leads and Housing Stocks Follow

One of these warnings is the lumber market.  Lumber prices crashed this spring, just as they did in the spring of 2011, and just before homebuilder stocks and the broader markets joined them in falling over 20% by August that year.

The chart below was first included in an article I wrote on 5/12 entitled " Timber!" where I first warned that Lumber prices were crashing and that it was likely homebuilder stocks and the housing market would follow. 

That chart is updated through today and warns of a similar setup as occurred in 2011 with lumber prices leading homebuilder stocks lower.

Since I wrote that article in mid-May, homebuilder stocks (NYSEARCA:XHB) peaked less than one week later and are now down over 8%.  Construction stocks (NYSEARCA:ITB) are faring even worse, approaching bear market territory as they have fallen almost 20% since mid-May.


What about the Homebuilder Stocks?

Homebuilder stocks, REITs (NYSEARCA:VNQ), and construction companies are showing major relative weakness when compared to the broader equities market.  This in and of itself is a bearish warning, but there is more to it. 

Home Depot just beat its earnings and raised its yearly estimates, as its CFO stated, "we are in the early stages of a housing recovery".  Yet its price is down to $75 from its high of $80 last month, a much larger decline than the broader market.  A stock with such great opportunity one would think wouldn't be lagging so much.

Like the other homebuilders and REITs (NYSEARCA:RWR), Home Depot's stock is showing major weakness to the broader market (NYSEARCA:VTI) and this is a warning. 

Everyone it seems is still bullish on housing, except for what matters, the markets.

If you listen to the markets instead of the supposed "experts", then you would have likely seen this significant decline coming as lumber prices warned us back in May that something was not right with the housing recovery. 

It's a simple thesis really.  If all is so well in real estate-land as the press and CEOs will lead us to believe, then why are lumber prices down 20%, construction company stocks down almost 20%, REITs (NYSEARCA:HCN) also approaching bear market territory, and homebuilders down over 8% in only three months?

Forget the Experts - You Can Take Advantage of It

The markets are warning us of even more downside as there are two potentially very negative things occurring with the housing stocks right now, and both will allow those prepared to take advantage. 

For one, looking at 2011 as an example, if lumber continues its decline, then it will likely lead homebuilders as well as the broader market lower as the temporary housing advance of the last year continues to slow significantly.  Lumber led equities by about three to four months in 2011 just as it is providing a similar lead time today.  Another decline in lumber would tip the odds that homebuilders will continue to fall.

Secondly, and likely even more ominous is an impending chart pattern setting up on both construction stocks as well as homebuilders that suggest at least another 10% downside on them both.

In the recently released ETF Technical Forecast I included a look at the homebuilders and construction ETFs and show when and how to take advantage of the setup.  Investors are fleeing the homebuilders and construction stocks and if a key support I am following breaks down, it would likely open the floodgates to a continued decline in these sectors. 

Some homebuilders such as KB Home ( KBH ) and Lennar ( LEN ) have already entered bear market declines of 20%+, but this could just be the tip of the iceberg.

This of course also would not bode well for the broader market (NYSEARCA:SPY) as the housing sector is around 18% of GDP.  The weakness in housing stocks has already put pressure on the markets (NYSEARCA:QQQ) the last few weeks which would no doubt only get worse if housing equities continue to decline.

Lumber prices are behaving very similar to 2011 which led a significant decline in housing equities.  Add that to the bearish chart patterns setting up on housing stocks and the downside potential is great. 

The ETF Profit Strategy Newsletter  uses historical, fundamental and technical analysis along with common sense to stay ahead of the housing market and other asset classes to keep investors on the correct side of the market.

Follow us on Twitter @ ETFguide



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: HD , KBH , LEN

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