Checking the foundation
09/19/18

●Housing data has weakened in recent months

●Homebuilder stocks have reflected sector weakness most of this year

●Six housing industry reports scheduled for next seven trading days


 

For all the talk about a booming economy and a still-hanging-around-its-highs stock market, one area of the economy—and the market—that has stumbled lately is housing. For the past several months, many housing numbers have come in soft, and most homebuilding stocks have followed suit.

And with more housing data on the way (housing starts today, existing home sales tomorrow, and Case-Shiller HPI, FHFA House Price Index, new home sales, and pending home sales next week), traders may be about to find out whether the industry is pulling out of a slump or extending its recent downtrend.

The following chart of the Housing Market Index (HMI), which was last updated yesterday by the National Association of Home Builders, is representative of the way things have gone lately for the industry:

NAHB/Wells Fargo National HMI, Sep 2016–Sep 2018. In a slump

Source: National Association of Home Builders (nahb.org)


While yesterday’s number (67) was in-line with estimates, it was also the second month in a row that the index has wallowed around its one-year lows, extending the pullback that has been unfolding since January. Similarly, existing home sales (due out today at 10 a.m. ET) have declined each of the past four months.

But a little perspective may be in order. Yes, most housing numbers have been falling, but many of them have been doing so from relatively high levels. Take a look at the following long-term (33-year) chart of the HMI. It shows the current pullback is comparable to others that have occurred over the past few years, and the index’s December high (74) was it loftiest reading since 1999.

NAHB/Wells Fargo National HMI, Jan 1985–Sep 2018. Pulling back from a nearly 20-year high

Source: National Association of Home Builders (nahb.org)


Of course, that last point may be part of the problem, since the HMI has, like the stock market, been in an uptrend since 2009 when it bottomed at 9 (that’s not a typo, by the way). Past is never foolproof prologue in the markets, but it’s kind of difficult to miss the fact that the index has experienced some sharp and/or extended declines after popping above 70. No trend lasts forever, and any lengthy trend gets called into question when it starts losing momentum, as this one has.

But because one number doesn’t dictate the future of the housing sector (there are more than a half-dozen data points released every month), and traders can’t trade housing indexes, anyway, let’s take a look at a homebuilding stock, LGI Homes (LGIH):

LGI Homes (LGIH), 4/11/18–9/18/18. LGI Homes (LGIH) daily chart. Declined to support

Source: OptionsHouse


It’s hard to tell from this chart, but like many other homebuilders, LGI seemed to like yesterday’s HMI number, rallying nearly 3% intraday. But the chart also shows the stock has been fighting downturn after downturn this year, and it has most recently consolidated right at the support level defined by its August low, unable to mount a rebound since first retreating to that level on September 7. The stock had already penetrated previous support in late July.

A few unexpectedly strong housing numbers this month could result in short squeezes in housing stocks that investors may perceive to be “oversold,” but if the data continues to come in soft, bears may look to push these stocks to new lows.

Like beams in a house, technical support can only handle so much weight before giving way. We may soon find out about the housing sector’s structural integrity.

 

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