Improvement in the housing market over the last 2 years has been a major pillar of the economic recovery in the U.S., despite what has been a historically high unemployment rate during the same time period. We have not been fans of the actual homebuilder stocks for the better part of this year, largely on valuation, but also because at this stage of the recovery the stocks will need to see earnings growth rates of 50% plus for the next few years to trade at reasonable earnings multiples last seen at the height of the housing boom in 2006, when the stocks were much higher and the earnings much greater. We don’t see that happening anytime soon and thus have avoided the stocks altogether in 2013.
Last month (Aug 13th) I highlighted the weakening technical set up for the components of the XHB, addressing the ongoing malaise of the actual homebuilding stocks in the index but also identifying what was an increasingly deteriorating set up for the retail components in the index (XHB Components Signalling Differing Views on The Stage of The Recovery -read here). The main take-away, and it continues to be an important theme with yields rising to new highs today:
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.
So flashing forward a few weeks after some mixed housing data of late, and that much closer to the Fed Taper, and rate sensitive names in the XHB like HD and TOL can’t get out of their own way.
The one year chart (below) of HD shows a clear break of the uptrend that has been in place since last fall, and approaching key support at the June lows, with the stock in official correction mode down 10% from the spring highs:
The TOL 2 year chart below, is either the buy of the year using $30 as a stop, or is about to break a very key 1 year support level that could see $30 become resistance in the weeks/months to come.
While some sectors like cyclicals and materials appear to becoming more comfortable with the notion that the Fed will be taking their foot of the pedal, interest rate sensitive names attached to housing apparently are less so and they are sitting on fairly key technical support levels, will a 3 handle on the 10 year yield cause a little Taper Tantrum? Looks like we will know in the days (if not hours) to come.