By Michael Kahn
For anyone just reading the news, now might seem like a great
time to buy a house or invest in the companies that build them.
After all, interest rates are at record lows, housing data are
improved and the economy overall, while not going gangbusters, is
getting better.
But one look at the charts tells a very different story.
Home-building stocks have gone nowhere for the past two years, even
as the broad stock market moved to record highs. Weak performance
on good news is the market's way of telling us that something is
amiss.
I cannot speak about the intricacies of housing away from the
stock market. But the parade of news, most recently a six-year high
in new home sales, should mean that the companies that build them
are good investments.
It is all good news for the industry yet the iShares U.S Home
Construction exchange-traded fund (ticker: ITB) barely beat the
market in October after lagging all year. Its chart shows an
arguable move above a short-term trendline, but the longer-term
200-day average remains unbroken (see Chart 1).
The ETF is still 10% below its February 2014 highs and
theoretically 56% below its 2005 bubble highs (the ETF did not
start trading until 2006). Compare this to the Standard &
Poor's 500 flirting with all-time highs.
To be sure, the way the ETF stalled over the past two weeks does
not rule out a short-term upside breakout. Should prices move up
only a half point from Wednesday afternoon's trading, just shy of
$24.00, then a rally to test 2014 highs just above $26.00 could be
indicated. It would be a decent percentage gain for traders.
For the rally to continue past that point, however, it would
have to push through a very strong price ceiling set by the
February high and the May 2013 high. Given its two-year history of
lackluster performance and absence of any momentum or cumulative
volume support, that seems unlikely at this time.
Within the sector, there is diversity in terms of technical
condition. One of the stronger names, Lennar ( LEN), is already
trading near its 2013-2014 highs (see Chart 2). Indicators,
however, show a stock without a firm technical underpinning. For
example, momentum indicators such as the relative strength index
(RSI) have set lower highs as prices set higher highs to suggest
the power of the rally is waning.
Also, cumulative, or on-balance volume, has not rallied to the
same degree as prices. This indicator is a good proxy for money
flowing into and out of the stock, and in this case suggests a
weaker investor commitment than at February's peak. For the year,
the net money flow is negative.
Of the larger stocks in the group, the weakest is Toll Brothers
( TOL). Its trend this year remains to the downside, and it is
currently trading near the bottom of a range that goes back to
mid-2012 (see Chart 3). This stock has been floundering longer than
many of its peers, and even though it made a nice bounce off
support last month, there was very little enthusiasm to keep the
rally going.
Home builders are just not acting as stocks that are ready to
lead a market advance. I am not so sure they could even keep up
with a rising market at all.
The bright spot, if indeed it is one, is the rally in several
supporting stocks. For example, major appliance maker Whirlpool (
WHR) scored a solid long-term breakout last month. And furnishings
and fixtures maker Leggett & Platt ( LEG) exploded higher in
October, although it is quite overbought at this time.
Is this a hint that home builders will be next to strengthen? Or
does it point toward a remodeling surge that benefits homeowners
and not home builders? The surge in home improvement retailers such
as Home Depot ( HD) may support the former view.
While the charts can always change, the fact is that
home-builder stocks have not performed well, even as their
sector-specific fundamental news was good. From the technical
perspective this is a sign of weakness, and I remain skeptical on
what is to come over the next few months.
Getting Technical Mailbag: Send your questions on technical
analysis to us at online.editors@barrons.com. We'll cover as many
as we can, but please remember that we cannot give investment
advice.
Michael Kahn, a longtime columnist for Barrons.com, comments on
technical analysis at www.twitter.com/mnkahn. A former Chief
Technical Analyst for BridgeNews and former director for the Market
Technicians Association, Kahn has written three books about
technical analysis.
Comments? E-mail us at online.editors@barrons.com
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