Housing stocks on the verge
06/27/18

In trading, it’s usually a good idea to take things at face value. The markets can’t really be “wrong,” in the traditional sense. Sure, they get rocked by news and overshoot higher or lower all the time, but they eventually get back in line—even if you don’t agree with the nature of that alignment. In other words, if you were positive a certain market was a buy and it’s now eight months and -30% later, you—not the market—were wrong.

Early this year many investors and analysts were bullish on the US housing market and, by extension, homebuilding stocks. It made sense: The economy seemed to be humming, employment was continuing to strengthen, stocks as a whole were still trending relentlessly higher, and many homebuilding stocks had great 2017s, especially in the second half. Lots of potential home buyers, sellers, homebuilder profits—and rising stocks.

That’s not how things have panned out, though. What happened to housing stocks in February also happened to the rest of the market, of course, but while many sectors have bounced back from the correction (or at least stabilized), housing stocks for the most part have continued to decline, with many of the big names approaching notable support levels or long-term lows in recent weeks.

It’s likely been frustrating for some traders, since in the first few months of the year most housing numbers were still very solid, if not gangbusters. But that’s changed more recently, and although one month’s data can’t be considered definitive, almost all the housing numbers released last week came in softer than expected, as did yesterday’s S&P Corelogic Case-Shiller Home Price Index.1 (Heads up: the Pending Home Sales report comes out today.)

Why has the housing market seemingly softened, especially during what’s supposed to be its seasonally strong period? A tighter-than-expected market, rising interest rates, higher input costs, and limited land availability may all have contributed.2

LGI Homes (LGIH), 12/22/16 – 6/26/18. Homebuilder stocks Rally and range

Source: OptionsHouse

Regardless, few homebuilding stocks have avoided the downturn. LGI Homes (LGIH) is a typical case. The chart above shows the stock nearly tripled from its February 2017 low to its January 2018 high around $80, and it even managed to push briefly to a higher high (the May 8 spike, which occurred on earnings) before retreating to its year-to-date lows within a now well-established support zone between roughly $55 and $58 (the bottom of a very wide trading range dating back to January).

Now, another twist: Yesterday, almost all homebuilding stocks, including LGIH, posted big gains on the back of the weak HPI number. (Rationale: Lower home prices could help fuel more sales.) But most of those gains occurred soon after the open, after which LGIH and its brethren retreated to the lower portions of their ranges.

LGI Homes (LGIH), 2/1/18 – 6/25/18. Homebuilder stocks. Breakout fake-out?

Source: OptionsHouse

The chart above shows the move popped LGIH out of the top of its short-term consolidation, but later in the session the stock was trading near its lows (although still up on the day). That type of pullback from the day’s high is unlikely to inspire bulls about the stock’s potential to stage yet another bounce off support.

Another downswing isn’t a foregone conclusion, but if the stock doesn’t build on yesterday’s gain—soon—traders may begin to wonder how long it can keep hanging around its lows before support gives way. A basic principle of trading is that when a market can’t hold on to gains in the wake of “good” news, it may be a sign of internal weakness. Stay tuned.

 

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1 Econoday.com. New Home Sales and S&P Corelogic Case-Shiller HPI. 6/25/18 and 6/26/18.

2 Zacks.com. Housing Industry Stock Outlook - June 2018. 5/31/18.