Housing: Rebuilding a Positive Trend for Investors

by: Jim Farrish

For all the negative headlines on housing, the sector keeps attempting to move higher. Below are two index charts illustrating the recovery that is in process, relative to housing. The first is the PHLX Housing Sector Index. You can see the consolidation near the lows after bottoming in July 2010. In December the index broke from the five month base near 104 and is moving methodically toward the April high. The gain has been more than 15% since the breakout. A move to the April high would be a gain of more than 10% from the 120 close.

(Click charts to expand)

The second chart is the Dow Jones Home Construction Index, which shows a similar bottoming and base building through the end of November. The break above 252 has resulted in a move of more than 11% currently. The home construction index shows another consolidation pattern in place since the peak on January 14th. The bias of the index is to the upside technically and a move above 290 would resume the uptrend. A move back to the April high of 333 would offer a gain of nearly 15%.

On February 16th housing stats for January clocked in at 596,000, well above the expected 520,000. The boost to housing and construction sectors was more than 2%, but more importantly the data helped to restore some investor confidence. The sector remains on the mend and in a confirmed uptrend short term.

Below is a chart of the SPDRs Homebuilders ETF (NYSEARCA:XHB). The uptrend remains in play and the move above $18.50 is a break from the five week consolidation and test of support. With housing in the news virtually every day the move higher is not likely to come without volatility. However, the opportunity is worth playing if you can stomach the ride.

Scanning the sector ETF has 18 stocks and the leadership is easy to spot. Lennar Homes (NYSE:LEN) moved above its April high at $21. Meritage Homes (NYSE:MTH) likewise has moved above the April high after testing support at the $22.50 level. Toll Brothers (NYSE:TOL) is within 5% of the April high. There are other stocks currently consolidating that look ready to move. KB Home (NYSE:KBH) has tested support at the 50 day moving average and looks prepared to resume its uptrend toward the April high.

The last component of this sector of interest is the suppliers. Mohawk Industries (NYSE:MHK) is in a trading range of $55-60 and is currently at the top of the range. A break higher would be a positive for the textile manufacturer. Lowe's Companies (NYSE:LOW) is in a trading range of $24-26 and is breaking through the top of the range. Ryland Group (NYSE:RYL) is in a trading range of $16.80-19 and is at the top end of the range ready to move higher.

The housing and homebuilder sector has been quietly moving higher as the recovery makes progress. The challenges in the sector are far from over, but the investment opportunities have been, and still are, available for those willing to do some digging into the rubble.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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