Housing Market: It Appears This Trend Has Reversed
By Bryan Bottarelli
In this article
No matter what was reported, housing stocks rallied.
In today's release, the housing market index fell to 36, which represented the first decline since September.
I'd expect to see further weakness in the homebuilding stocks in the coming weeks. Here's how to play it…
Housing Market: It Appears This Trend Has Reversed
There was a time not long ago where the homebuilders could do no wrong. Either they reported weak numbers, where the housing stocks rallied because it was perceived as a strong buying opportunity, or the homebuilders reported strong numbers -- and the housing stocks rallied because it was perceived that the sector had reached the bottom. In other words, no matter what was reported, the stocks rallied.
But now it appears like this trend has reversed. Sparked by the subprime meltdown, the homebuilding sector is now selling off on any news -- no matter if it's perceived as good news or bad.
Just today, for example, the National Association of Home Builders reported the latest findings of the NAHB/Wells Fargo housing market index. The NAHB includes about 235,000 members who build about 80% of the single-family homes each year -- so the sentiment of this group is considered very important for the entire sector.
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In today's release, the index fell to 36, which represented the first decline since September. To put this figure into perspective, the index was at 54 a year ago and 70 two years ago. This clearly indicates that around one-third of builders have confidence that the housing market is healthy while two-thirds think the housing market is set for further declines.
Housing Market: This Market Is Struggling
How is this figure tabulated? To be honest, it's not very mathematical. Builders are asked to rate current and future sales as “good,” “fair” or “poor.” They are also asked to rate the traffic of prospective buyers as “high,” “average” or “low.”
An average reading would come in at 50, and as you can see, the current reading of 36 shows a market that's struggling to keep up with past years.
Because of this, I'd expect to see further weakness in the homebuilding stocks in the coming weeks -- and I'd recommend using any buying strength as an opportunity to establish a downside put position.
In fact, as I write, the Dow is trading up over 100 points yet the homebuilder stocks are not participating in the gains. This is a telltale sign that the sector is currently an underperformer.
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Bryan Bottarelli is the head trading tactician for the WaveStrength group and contributing editor for Taipan Financial News. Coming off the floor of the Chicago Board Options Exchange (CBOE), Bryan uses WaveStrength chart forecasting to develop wining options plays for his service called WaveStrength Options Weekly. Bryan is also the lead editor of BottarelliResearch, an elite membership service that he independently publishes himself.
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Related Resources
Philadelphia Housing Sector: HGX Finds Resistance. - MarketWatch.com
Home Builders: Housing Spillover from Sub Prime Woes. - MarketWatch.com