Stock Market Indicating the End of the Housing Boom
by Martin Goldberg CMT. July 29, 2004
Similar to the Nasdaq, in the face of rising prices and positive headlines galore for the housing sector in general and the homebuilders in particular, we may have seen the top in the housing sector. It seems as if everyone I know has a friend or relative that is involved with a current or recent real estate transaction. At my daughter's summer swimming team practices and meets, I seem to hear a significant amount of buzz about the local real estate market. Is this a sign of a top? The forward thinking, but sometimes-manic stock market is shouting that the end of the housing boom is near. The intermediate term charts of the homebuilders indicate that practically all of the stocks are heading down. Note that with one exception, all of the charts have 200-day moving averages sloping downward. The fundamentalists are debating whether it’s a bubble or not; however, a technical view of the charts suggests that the best future for housing bulls would be a soft landing, and the worst case could be much worse. If those making the fundamental housing bear case are correct, there is nothing in the current stock charts to refute their case. Similarly, there is no evidence in the homebuilder charts to suggest that the new era housing bulls are right.
I have compiled the one-year daily charts of key homebuilder stocks below. It doesn't take a professional technical analyst to peruse these charts and see that they are clearly unhealthy. Viewed with their previous run-ups, a technical analyst's intermediate term position would be clear (short). The only difficulty would be to establish which particular stock to short and at what entry point. Note the obvious erratic trading patterns typical of a top occurring with a backdrop of bullish rhetoric and an overactive trading public.
While, the individual stock charts suggest erratic and bearish trading patterns, the entire homebuilder sector viewed together in a single chart suggests a much clearer and distinct bearish pattern. Below is a two-year weekly chart of the Dow Jones US Home Construction Index.
The action of the DJ US Home Construction Index has traced a clear head-and-shoulders pattern, and now it sits at the neckline. If the neckline is decisively broken, classic technical analysis suggests that the index will go from about 555 to about 400, a drop of 28%. If the existing support just above 400 is broken, the index may go down to about 325 where there is technical support. There is likely to be several whipsaw rallies around the neckline to draw more suckers in; but the intermediate term trend is down and should not be ignored. While whether to short these stocks is a personal investing style decision, I will not be shy to suggest that intermediate long positions should be liquidated on good news and rallies. These seem to occur concurrent with bond market rallies that occur after debt auctions, and you may consult Mike Hartman's articles as to why this occurs.
The following is a monthly chart of the DJ US Home Construction Index from January 2000 to the present. It encompasses most of the boom in homebuilder's stocks. The trading volume at each price is plotted from the right hand axis, "down" volume in red, and "up" volume in gray. It is notable that there is only negligible volume from about 520 to about 480. This suggests that the 8% drop between these levels, corresponding to the break of the approximate neckline may occur rapidly.
Unlike the multiple head-and-shoulders (HAS) pattern (described last week) which is a "lazy" pattern, and tends to barely reach its measurement objective slowly and then corrects, the simple HAS (one head two shoulders) tends to reach its minimum price objective faster, and often exceeds its minimum objective. Therefore from a technical perspective, the DJ US Home Construction Index chart is more bearish than that of the current Nasdaq index. (This assumes that both indices break their respective necklines decisively to the downside.)
From a fundamental perspective, the bearish case made by many intelligent analysts is extremely bearish. It predicts record foreclosures and a drop of artificially inflated house prices caused by Federal Reserve monetary alchemy. The bearish case suggests that residential real estate, as the main asset that lending institutions are using as collateral in making new ill-advised loans, is vulnerable for a debt bubble implosion. This is not the time, or author for an in depth discussion of whether there is a current credit bubble with residential real estate as the focal point (but see the work of Doug Noland). What is relevant however is that the implication of the bear case for residential real estate is so bearish that when their charts are clearly bearish, it requires investors' undivided attention if not immediate action. What if these people are right?
It was a rally day for the US Homebuilders. Consider the daily performance and relative volumes:
|Stock||% Increase (decrease)|
29 July 2004
(% of Average Day)
Following is a closer look at Standard Pacific Homes (SPF), which sold off on very heavy trading today:
As you can see, as with the entire index, SPF has traced a head and shoulders reversal pattern. It now sits at its neckline. From a tactical perspective, in my view it would be risky to short the neckline break since HAS whipsaws have been a common technical occurrence of late. And when they fail, they fail fast and tradable!
With that in mind, let's look at the Nasdaq:
As you can see, back in May, it appeared that the neckline (or support) was broken; yet there was a sharp and tradable rally that immediately followed. Given three closes below the neckline, one may have thought that the Nasdaq was "toast." Yet over the last few days, the Nasdaq has made some pretty candlestick patterns that suggest that it could go higher, as indicated in the 3-month daily chart below.
Is there any thing interesting about the recent Nasdaq action? As I pointed out before, when the Nasdaq seems to be in peril, the QQQ index-traded shares seem to be responsible for saving the day:
It was interesting that yesterday, the QQQ shares traded more than 150 million shares, while the full Nasdaq index traded only 1.8 billion. The last time QQQ index shares traded that much was when the Nasdaq was in similar peril in May. What I suggested may have been happening in the article of a few months ago appears to be happening again!
The Dow and S&P were up slightly, the Russell 2000 and S&P midcaps were up 1.6 and 1.3%, respectively. It was a day for the speculative favorites. Yahoo was up over 2%. Gold was down $2, and silver was down $0.02, yet the XAU and the HUI were up about 1.5% each. The 10-year note was little changed. The dollar has rallied and now sits above its long-term trendline. (I wrote the note on the chart below late at night when the $USD sat on the lower blue trendline, honest! another whipsaw.) Way to talk it up Uncle Al!
Have a great evening!
© 2004 Martin Goldberg