We’re getting more evidence today that the housing stocks have become “washed-out”…and that a lot of bad news has already been priced into the group! This does not mean that the group has seen a bottom that will hold for years to come, but it does seem to be telling us that the group has become quite ripe for a “tradable” rally.
Let’s face it, the news on the housing front has been absolutely HORRIBLE over the past 3 weeks. The earnings out of D.R. Horton (DHI)and KB Homes (KBH)were terrible…and this morning’s NAHB Housing Market survey was the biggest one-month decline since 2014 (and took it to its lowest level in more than 2 years)! HOWEVER, the ITB home builders ETF has actually RALLIED slightly trading slightly over the past 3 weeks…and it’s actually FLAT today (despite a 2% decline in the broad stock market)…..Experience tells us that when a group does not decline further after getting more bad news (especially when it has been as bad as it has for the housing stocks in recent weeks), the group has become “washed-out”.
We think this is particularly true for the housing stocks right now. As we mentioned in late October, the ITB had already become EXTREMELY over-sold after its 35% decline over the previous 9 months…based on both its daily AND weekly RSI charts.
Not only has the group become quite oversold, but sentiment on the group has turned decidedly negative over the past few weeks…with several Wall Street firms turning negative over the past three weeks. We’re not sure where these people have been over the last 10 months (while interest rates were rising and the sector was falling 35%), but we turned negative on the group in February…..No, we did not top-tick the housing group, but the ITB has fallen more than 20% since we turned bearish on the homebuilders.
Again, we are NOT saying that the group has bottomed for this cycle. We’re just saying that its oversold and over-hated condition…combined with its pretty good action in the face of VERY negative news over the past few weeks…tells us that the group is very ripe for a “tradable” rally (one that lasts a few weeks, not just a few days). This should be especially true if the broad market can finally bounce in a more sustainable way.
No market moves in a straight line…and we just think that those who want to sell these names will get a better chance to do it at higher prices in the coming weeks. (Also, we would not short the group down here for tickets to The Masters…or anything else!!!!)…..Even in the worst bear market in the housing group in a generation (that bottomed in early 2009) saw SEVEN rallies of more than 10%!!!!! In fact, four of them were between +20% and +55%!!!
There is no question that the fundamental picture stinks for the group…and we’ll get a few more data points on this group over the next two days…so we could/should get some more negative news rather quickly. However (and to repeat), when a group acts positively in the face of a lot of negative news, it’s almost always a sign that the short/intermediate-term picture for the stocks is more positive than most people think!!!!….(As we’ve all heard a zillion times in the past, there is sometimes a big difference between a company/group…and the stocks of those companies/groups.)