Shelter from the storm?

●Housing stocks have jumped in recent days, bucking broad-market trend

●Homebuilders got hammered this year even as market made new highs


As the stock market skidded to new lows in the past week, one of the more eyebrow-raising developments was the resilience of bruised-and-battered housing stocks.

Actually, it’s been much more than resilience. From October 19–22, a period when the S&P 500 dropped another 4.6%, homebuilders Toll Brothers (TOL) and LGI Homes (LGIH) gained 1.7% and 6.3%, respectively. These are stocks, by the way, that have coughed up around -34% (TOL) and -45% (LGIH) this year.

And yesterday, when the broad market rebounded (see ‘Market Mover Update”, below), both stocks really kicked into gear, with TOL jumping more than 7% intraday and LGIH rallying 5%, putting both of them up double-digits since October 22:

S&P 500 (SPX), Toll Brothers (TOL), LGI Homes (LGIH), 10/22/18–10/30/18. Housing stock relative strength.

Source: OptionsHouse

TOL and LGIH aren’t unique cases, either. Lennar Homes (LEN), D.R. Horton (DHI), KB Home (KBH), and other homebuilders have also rallied strongly or held their ground over the past week or so.

Unlike utilities—a traditionally “defensive” area of the market that has been one of the three strongest S&P 500 (SPX) sectors for the past four weeks—many homebuilding stocks had dropped to 18-month or longer lows before beginning to strengthen last week. (Many utility stocks are closer to multi-month highs than lows.) Also, the upturn has occurred even as housing markets numbers have continued to be anemic, the most recent example being Monday’s S&P Corelogic Case-Shiller HPI.1

If there is a defensive component to the move into homebuilding, these stocks could lose their bids in the event of a strong, market-wide rebound, although yesterday’s action suggested that may not be the case. But there’s also the possibility that these stocks finally reached levels at which some valuation models and trading programs defined them as buys.

Long-time traders would likely hesitate to jump into bullish trades immediately after the type of exceptionally large gains that came across the wire yesterday. Rather than chase momentum, such traders generally prefer to catch a market when it’s pulling back.

If the move’s for real, then bullish momentum should quickly return. If not, then no deal.

Market Mover Update: Yesterday’s S&P SPX rally came a day after the Cboe Volatility Index (VIX) made a lower high and a lower close than it did at the October 11 swing low, which is the bullish signal described in “If the VIX could talk.” However, it was the second day in a row the “fear index” had diverged from its typical pattern vis-à-vis the SPX’s previous swing low (i.e., declining instead of rallying when the market drops)—a reminder that market signals are rarely perfect, but demand sustained attention nonetheless. You can’t change the direction of an aircraft carrier as fast as you can a Smart Car, after all.

S&P 500 (SPX) and Cboe Volatility Index (VIX), 8/31/18–10/30/18. Lower SPX, but also lower VIX.

Source: OptionsHouse

Many traders will be watching to see if the VIX continues to climb to relatively lower highs and closes if and when the SPX makes new lows, as that would reflect a declining degree of investor fear and the potential for an upside reversal, even if it’s only temporary.

Today’s numbers (all times ET): Eurozone Unemployment Rate (6 a.m.), ADP Employment Report (8:15 a.m.), Employment Cost Index (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.).


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1 Econoday. United States: S&P Corelogic Case-Shiller HPI. 10/29/18.