Flip or flop?
02/27/19

●Some homebuilder stocks have been rallying since last October

●Rally has unfolded despite still-weak industry numbers

●New Fed stance may keep mortgage rates stable to lower


Get ready for a tale of contrarianism, on multiple levels.

Although few areas of the US market were spared by the end of the year, homebuilding stocks were a group that got hit early and often in 2018. The chart below shows the S&P 500 (SPX) along with three homebuilders, LGI Homes (LGIH), Pulte Group (PHM), and Toll Brothers (TOL).

LGI Homes (LGIH), Toll Brothers (TOL), Pulte Group (PHM), S&P 500 (SPX), 10/20/17–10/24/18. Homebuilding stocks price chart. Bulldozed in 2018.

Source: Power E*TRADE


After outgaining the SPX in the final months of 2017 and beginning of 2018, the three stocks mostly ignored the broad market’s April–September rally, and by last October were down 24% or more from their levels a year earlier. And amid month after month of poor-to-middling housing market numbers and continued stock declines, it’s no wonder the industry fell off the radar of many traders, other than adept short sellers.

Of course, that’s not the end of the story. The following chart shows that since October 5 all three homebuilders have led the SPX to the upside, and LGIH’s lead has been significant, to say the least. While the SPX continued to drop until late December, the three stocks climbed steadily off their October bottoms.

LGI Homes (LGIH), Toll Brothers (TOL), Pulte Group (PHM), S&P 500 (SPX), 10/5/18–2/25/19. Homebuilder stocks price chart. Building a foundation?

Source: Power E*TRADE


What’s more, they’ve done it as housing market numbers continued to be mostly blah—occasional positive surprises surrounded by weakness, including yesterday’s reports, which showed soft home prices and a big miss in the housing starts number. (Pending Home Sales data is due out today.)

So, we have housing stocks that began rallying while the broad market was still falling out of bed (Contrary Exhibit A), and doing so in the face of a wobbly housing market (Contrary Exhibit B).

Before commenting further about the price action over the past few months, here’s another contrarian curveball to ponder: Given the apparent ongoing weakness in the housing industry, is it possible that the current outperformance of the housing stocks is the real contrarian move?

Yes, it is. And, yes, the picture is a little different over the past couple of months since the broad market got into gear: LGIH still leads the SPX by a wide margin, but TOL is neck-and-neck with it, and PHM lags it (but is still up on the year).

Nonetheless, some traders may consider the late-2018 bullish divergence of these stocks from the broad market as evidence of downside exhaustion. After all, when a stock (or industry) doesn’t go lower—and in fact, climbs—in the face of robust market-wide selling, it’s possible that all the people who wanted to sell have already done so.

There’s also the interest-rate factor: The Federal Reserve’s decision to press the pause button on hiking rates lightened one of the loads the housing industry had to bear last year—rising mortgage rates. Last month, for example, one measure of mortgage rates dropped to its lowest level in nine months, and mortgage applications increased.1

Traders may be watching the industry a little more closely than they have in a while.

Final note: LGIH released earnings yesterday, missing both earnings and revenue estimates, but offering positive guidance for the year.2 The stock dropped as much as 7% intraday before rallying well off its low in the afternoon. At the time of this writing, TOL was scheduled to release earnings after the market close.

Market Mover Update: An expected pullback? CRSPR Therapeutics (CRSP) walked back some of Monday’s monster rally, retreating around 7%.

Today’s numbers: International Trade in Goods (8:30 a.m.), Factory Orders (8:30 a.m.), Retail Inventories (8:30 a.m.), Wholesale Inventories (8:30 a.m.), Jerome Powell Speaks (10 a.m.), Pending Home Sales Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.). Day 2 of Fed Chairman Jerome Powell’s testimony before congress.

Today’s earnings include AES (AES), Amarin (AMRN), Best Buy (BBY), Campbell Soup (CPB), Lowe's (LOW), Weibo (WB), Apache (APA), HP (HPQ), L Brands (LB), Square (SQ), Teladoc (TDOC).

 

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1 Zacks.com. Top 5 Stocks to Buy Now on Solid Homebuilder Confidence. 1/19/19.

3 StreetInsider.com. LGI Homes (LGIH) Misses Q4 EPS by 3c, Revenues Miss; Offers FY19 EPS Guidance Above Consensus. 2/26/19.