This week saw some mixed data come out concerning housing in
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
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 (
) earnings beat and full year guidance raise. This now all
seems bullish. So which is it, a negative housing market or a
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.
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
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
where I first warned that Lumber prices were crashing and that it
was likely homebuilder stocks and the housing market would
That chart is updated through today and warns of a similar setup
as occurred in 2011 with lumber prices leading homebuilder stocks
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
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
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
In the recently released
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 (
) and Lennar (
) 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.
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
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