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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