Housing Is Bottoming, But Wait for the Breakout in Homebuilders

Bloomberg recent reported that Homebuilders are buying land after years of inventory cuts. Coupled with a buoyant new home sales report, some investors have concluded that housing has bottomed and is poised to rebound.

Wait for the relative breakout

The chart below shows the S&P 500 Homebuilders Index relative to the S&P 500. Relative to the S&P 500, the Homebuilding group is currently undergoing a basing process but calls for an upturn may be premature. Technically, the group needs to break out of its relative trading before we can definitely call for a recovery.

My gut feel tells me that sentiment isn’t quite washed out for an upturn. We need a magazine cover style capitulation, or for the popular media to really jump on the story. Here is an example from Britain’s housing bust from the 1980s:

Bottoms are a process

This form of relative analysis isn't new. I posted on the bottoming process undergone by the group last August and again in January. I suggest that investors shouldn’t get overly enthusiastic in anticipation of a rebound. We need to watch and wait for the relative breakout before sounding the all-clear.

Comments

[apppro:]

I love your basing chart. As Dylan said, "When you're at the bottom you have no further down to go!" Or something like that.

Anyway, if you now wait for the breakout you'll be buying at the high when all the pundits will be saying sell because we've not topped out.
This short induced sell-off/recession was over when they took out Lehman's and moved on, so buy everything or we will have a 'W' if you wait.

Aug 30 04:16 PM

[Tom Armistead:]

I like the chart, think you are correct this is a process, probably early to get overly optimistic.

The homebuilders I own all look farily attractive based on typical multiples to book value but where I have trouble is doing a realistic projection for next year that shows them making enough money to justify current prices based on earnings.

Possibly they have written down the value of their land and lots enough so that it will be easy to make money if they can sell something like 30% more houses, if they actually make money some of the deferred tax assets they wrote off could perhaps be resurrected.

Wait til next year.

Aug 30 04:46 PM