By the end of last year, the rebound in real estate prices and the explosive rallies in many of the homebuilding stocks had convinced the majority that this important part of the economy had turned the corner.
The data this year has continued to support a positive outlook for the home builders despite the uptick in mortgage rates over the past few months. Over the past year, the S&P Case-Shiller Index has improved monthly, and with last month's data is now just over 11% from the all-time high set in 2005.
The housing affordability index was at an estimated 145 in June, which means that it is still quite affordable. In early 2005, it was well below 120, which meant that housing was not very affordable. In contrast, it was well above 200 in 2010-2011 at the bottom in the housing market.
Nevertheless, this has not been a good year for the homebuilders or home construction stocks despite the market's overall strength. So far in 2013, the iShares Dow Jones US Home Construction ETF (ITB) is just up 3.8%, and as the chart shows, it is lagging the Spyder Trust (SPY) by over 15%.
Of the home construction stocks on the chart, Lennar Homes (LEN) has been the weakest as it is down 13.7%. Both Toll Brothers (TOL) and DR Horton Inc. (DHI) are both now flat for the year. DHI was up over 14% for the year on May 14, so it has had a rough couple of months.
The low in most of the home construction stocks was confirmed in the middle of October of 2011 as volume exploded when they broke through resistance. If you look at the performance since that low, then ITB is up 126%, with the individual home construction stocks up from 92% to 116%. This is compared to a 41% gain in the Spyder Trust (SPY).
The monthly chart of the DJ US Home Construction Index ($DJUSHB) shows the decline from the 2005 high at 1120 and the subsequent formation of a base, lines a and b, between late 2008 and early 2012. The bottom was completed in February 2012 as monthly resistance was overcome.
The $DJUSHB closed above the 38.2% Fibonacci resistance early in 2013, which makes the next upside target at 627.25, which is the 50% retracement resistance. The index has dropped back to the 20-month EMA at 422.94 on the correction from the May highs.
The monthly relative performance moved above its WMA in November of 2011. The major bottom was confirmed in the middle of 2012 when the resistance at line c, was surpassed. The RS line is currently below its WMA.
The $DJUSHB closed above the resistance in February and the relative performance moved above its WMA in November of 2011. The major bottom was confirmed in the middle of 2012 when the resistance at line c, was surpassed. It has now dropped back below its WMA.
The iShares Dow Jones US Home Construction ETF (ITB) has over 30 stocks with PulteGroup, Inc. (PHM), Lennar Corporation (LEN), and D.R. Horton, Inc. (DHI) its largest holdings. It also includes the two main home improvement companies, as well as others involved in the building and furnishing of new homes. Here is the complete list from the iShares Web site. The SPDR Homebuilders (XHB) has less exposure to the homebuilders and more to the home-building related industries.
In a recent article, I examined the technical outlook for the two largest home improvement stocks, Home Depot, Inc. (HD) and Lowe's Companies Inc. (LOW), which are both included in the homebuilding ETFs.
The weekly chart of ITB shows the impressive rally from the October 2011 low at $8.21 and the high on the week of May 25 at $26.21. The weekly uptrend was first broken in June as the weekly starc- band was tested. There is next weekly support now in the $21.34 to $21.42 area and a weekly close below these levels would signal another push to the downside.
There is additional support in the $20 area with the 38.2% Fibonacci retracement support from the October 2011 lows now at $19.30. This also coincides with the weekly starc- band. The 50% support level is at $17.16. Typically, a weekly correction within a long-term uptrend will test the 38.2% support but should hold above the major 50% support level.
The relative performance moved above its WMA in early October 2011 (line 1) and began an 18-month uptrend. The RS line held above its WMA and support at line b, during this period. The RS line made a new high with prices in early 2013 but then formed a lower high in March, line c.
The break of the uptrend the week of April 19 (line 2) confirmed the initial negative divergence and a second negative divergence was formed at the May high. The RS line is now well below its declining WMA but is reaching support from the middle of 2012.
The on-balance volume (OBV) also moved above its WMA in early October and held well above it until November of the next year. By early 2013, the OBV was back above its WMA and did confirm the May price high. The OBV tested its uptrend, line d, in June, before rallying back to its flat WMA.It again tested this resistance and is now below its declining WMA. It would likely take at least two-three weeks before it could possibly turn positive.
The daily chart of the iShares Dow Jones US Home Construction ETF (ITB) shows that for all of 2013, it has traded above the $21.15 level. A break of this level should take the remainder of the weak long positions out of the market. There is further support in the $20-$20.40 area with the major 38.2% support level at $19.30.
The daily relative performance confirmed the March high but then formed a negative divergence in May as was also observed on the weekly chart. The daily RS line formed lower lows in April as the weekly uptrend (see Figure 4) as broken. The multiple time frame RS analysis signaled that ITB was not longer leading the S&P 500 higher as it had since late in 2011. The RS line has continued to make new lows and shows no signs yet of bottoming.
The daily OBV did confirm the May highs but dropped below its uptrend, line d, in early June. Then in the middle of June, it rallied back above its WMA and tested this support, which was now resistance (see arrow). The OBV soon dropped to new correction lows and shows a well-defined downtrend, line e. A move above the previous peak and the downtrend would be the first sign that ITB was bottoming.
An examination of the weekly charts of some of the largest homebuilding stocks will give us a better idea of how much longer the correction may last. I try to monitor most of the stocks in this industry group as oftentimes a few stocks will turn ahead of the rest. This Finviz link will take you to a list of those that trade over 300k per day.
Lennar Corp. (LEN) is a $6.33 billion homebuilder that peaked at $44.40 on May 20 and hit a low so far this week at $32.10. This is a drop of 27.7% from its high as it is just above the 38.2% Fibonacci retracement support at $31.89.
There is additional support in the $30 area, line a, which corresponds to the May 2012 high. It is also roughly half way between the 38.2% and 50% support levels, which is often a high-probability entry level. The weekly starc- band is now at $27.68, and it will normally flatten out before a market can complete a bottom.
The relative performance broke its downtrend and turned positive in early November 2011. The RS line formed a series of lower highs and lower lows until February 2012. The uptrend, line b, was then broken and the RS line formed lower highs in May, line c. This negative divergence was a sign that money was moving out of LEN as it was no longer a market leader.
The RS line broke support at the end of May ahead of prices and it has continued to make a series of lower lows. The RS line is now well below its declining WMA and is getting oversold.
The OBV has held up much better as it is just below its WMA but is well above the support at line d. It should be watched closely for signs of a turn as it could move above the recent highs in just a few weeks.
DR Horton Inc. (DHI) is a $6.13 billion homebuilder, which formed a spike low in October 2011 at $8.03 and hit a high of $27.72 at the end of May. That week, a doji was formed and the following week an LCD was triggered.
DHI declined sharply for the next four weeks as the weekly starc- band was tested in the latter part of June. DHI has dropped to new lows again this week. The 38.2% Fibonacci support was broken three weeks ago with the 50% support at $17.81. The weekly starc- band is now at $16.26 with the 61.8% Fibonacci support at $15.45. This has been one of the weaker homebuilders and the next likely downside target is in the $17.80-$18.20 area.
The relative performance did confirm the May highs (line a) but dropped below its support, line b, in early June. The RS line is now in a clear downtrend and is below its declining WMA.
The OBV also made a new high with prices but dropped below its WMA two weeks after the highs. It failed to move back above its WMA in early July but is slightly above the support at line c. The daily OBV (not shown) is still holding above the current lows so a positive divergence could be formed in the next few weeks.
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The Ryland Group Inc. (RYL) is a $1.7 billion company that operates as a homebuilder and a mortgage-finance company. It has stayed in a trading range over the past six weeks with resistance at $42.48 and support at $36.10. It is holding above the uptrend from the 2011 lows, line a, in the $36 area.
In May, the high was $50.41 and the stock is now down 25.7% from that highs. The 38.2% Fibonacci retracement support is at $34.53, which could be tested in the next few weeks. The weekly starc- band is at $30.89 with the 50% support level at $29.60.
The relative performance dropped below its WMA in early June after making a new high with prices in May. The uptrend from the 2011 low, line b, is being tested this week. The on-balance volume (OBV) is holding up even better as it is still above its WMA and did not drop much during the sell-off from the May highs. This indicates that there was not much volume on the sell side.
There is initial weekly resistance and the quarterly pivot now at $42.47 and a strong move above this level should signal that the correction is over.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.