$XHB Components Signalling Differing Views on The Stage of The Recovery

by Dan August 13, 2013 1:22 pm • Commentary

IN an economic recovery that has repeatedly trumpeted the housing recovery as one of its pillars, the XHB’s under-peformance to the broad market ytd (up ~12% vs the SPX up 18.50%) is quite interesting because the index is actually being weighed down by its hombuilding components like TOL, PHM and DHI (all down on the year), while the suppliers like WHR and retailers like HD and LOW are within a few % of their 52 week highs.  There is a real tug of war going as it relates to what inning we are in of the housing recovery, and it is playing out within this index.

The 1 year chart of the XHB shows a bit of exhaustion as it made a series of lower highs since making new 5 year highs in MAY and now could be forming what some technicians call a head and shoulders top.

XHB 1 year chart from Bloomberg
XHB 1 year chart from Bloomberg

All Homebuilding stocks are not created equal, though.  Looking at PHM, you would think that we are headed into a housing downturn, the chart is a bit sick breaking key near term support and below almost every major moving average.

[caption id="attachment_29199" align="aligncenter" width="589"]PHM 1 yr chart from Bloomberg PHM 1 yr chart from Bloomberg[/caption]


The one year chart of TOL on the other hand, while clearly heavy, has acted much better YTD, only down about 3%, vs PHM down 15% and LEN down %17.  The $30 support level is obviously an important one, but a test and hold could set up for a decent long back towards the mid $30s.

[caption id="attachment_29200" align="aligncenter" width="589"]TOL 1 year chart from Bloomberg TOL 1 year chart from Bloomberg[/caption]


Lastly looking at ex-homebuilding components we see much better relative strength.  For instance, despite HD not making a new high with the SPX last week, the stock has been consolidating right below near term resistance and looks to be gathering steam for a breakout, or obviously a break below the uptrend line that has been intact for over a year:

[caption id="attachment_29201" align="aligncenter" width="589"]HD 1yr chart from Bloomberg HD 1yr chart from Bloomberg[/caption]

HD reports earnings next week, and it’s been up following earnings on each of the past 4 earnings releases.

In the short-term, homebuilders have been moving quite closely with interest rates.  As rates have moved higher due to taper concerns, homebuilders have been one of the sectors most affected by concerns about future demand for new homes.  While management executives have mentioned that they have not seen much of an impact on demand from higher rates just yet, the market is clearly more concerned.  Today’s price action is again indicative of that concern, as the 10 year rate rose 8 basis points to 2.7%, and homebuilders are getting punished.

If tapering does not occur in September, or rates drop over the next month anyways, then expect a sharp bounce-back among the homebuilders.  They’re quite oversold in the near-term on that fear.  But in the long-run, as we mentioned on several occasions this spring, homebuilder valuations are still quite high compared to the housing bull market of last decade.