Price Action in Homebuilders Says Worst is Ahead

Did you know that homebuilding stocks topped way back in May 2013 and are still down in price over 15% since?  It’s true.  And 16 months later, homebuilders still have not made new price highs!

Check out the first chart below which shows the S&P Homebuilding Subindustry Index (SNP:^SP500-25201030), and how it topped way back in May 2013.

Did you also know a similar thing occurred at the 2007 market top when homebuilders topped in January 2006, well before the broader market’s major peak in October 2007?

This time around, since the May 2013 top, it has already been 16 months since housing’s stocks topped.  History certainly doesn’t always repeat, but it does often rhyme likely making the recent top more than just a coincidence.

Housing stocks are indeed in a declining trend.  They also continue to show relative weakness to the broader market as displayed in the bottom of the chart above.  Finally, in addition to their topping well before the broader market, homebuilder indices are repeating similar patterns in their price activity as they did before the last market top in 2007.

The next chart shows some of these similarities.  Price is making lower highs while momentum is also in a declining trend, just like the 2006-2007 period shown by the blue trendlines.  Notice too that longer term, homebuilders are also nowhere close to making new all time highs, another sign of relative weakness since the broader market has already blown past its previous highs.

Now, check out the next chart, updated through today, which I first included for our subscribers and was also included in one of my 2013 public articles warning of the housing top.  The article, “The One Housing Indicator You Shouldn’t Ignore“, explains how the housing market would soon follow lumber prices as rising home prices did not correlate to lack of recovery in housing fundamentals.

WATCH: Falling Lumber Prices are Leading Homebuyers Lower

Housing fundamentals have been weak throughout this “recovery” as lumber prices have also fallen in price by 15%, leading the housing market lower.  Just how weak has the housing market been during this recovery?  See for yourself in the chart below.

Demand fundamentals such as housing transactions or new single family home builds haven’t even recovered to 1991 recession levels!  And that is during a time of all time low interest rates (NYSEARCA:TLT)!

So what do you do about it now?  What’s the play here?

I have to admit, I currently am home shopping, not because I think I can make money in buying a home now. Quite the contrary! We all need a place to live, because life happens . So that’s my motivation for house shopping.

Where I live (Austin, TX) also happens to be one of the hottest housing markets in America and rental prices are skyrocketing.  So much that the rent versus own equation still makes sense even if many home prices have risen over 50% in three years, a testament to good ole fashioned fundamental analysis as the rent versus own equation remains one way to help you from losing your shirt in the event of another housing price collapse.

Although home prices have risen in price significantly, so have rental prices. That makes a home purchase still relatively valuable in many cases, albeit much less today than a few years ago.

I should also mention, when you are recently married (as I am) you learn that not all decisions are left up to the market strategist as some of the more subjective reasons for home ownership are given much heavier weights in the decision making process!

Enough about my situation, though, and back to the analysis.

Instead of being helpless in a home purchase during such times that clearly show home prices are struggling to rise further and may again be rolling over, I am taking advantage by hedging my housing bet.

And I think now happens to be one of the best times for such a hedging strategy.

So how am I doing it?

By shorting the iShares Dow Jones Home Construction ETF (NYSEARCA:ITB) and the SPDR S&P Homebuilders Index ETF (NYSEARCA:XHB) which are showing great technical short setups.

Check out the chart below of ITB which I first brought to my Technical Forecast readers’ attention on 8/20/14 once price regained its 200-day moving average.

Then on 9/3 after 10 consecutive closes above its 200 day moving average, ITB got crushed 2%, where I wrote:

“shorting ITB here (especially on any bounces) with a stop just above the 200 day MA.  Shorting the bounces should risk less than 50 cents for a potential gain of a few dollars.  These are the kinds of high probability opportunities we like.”

On 9/7 subscribers to our Technical Forecast got another update, reiterating the sell setup:

“ITB offered great entries for shorts on Thursday and Friday with what looks like the counter-trend rally after Wednesday’s big decline.  Shorting here with a stop just above the 200 day MA results in a risk less than 1% with a potential reward over $1.00 (5%+).

That trade is still in its infancy, but I think it is still a great opportunity for those worried about the housing market to hedge their bets.  For most homeowners, their home (NYSE:KBH) is the largest asset in their portfolio making it a prime candidate to price protect, but often the most overlooked.

Even if we are stopped out of this particular trade, no worries!  The loss will be minimal here (around 1% or less), and given the fact housing stocks (NYSE:MTH) remain in a downtrend, we likely will get plenty more high probability opportunities down the road, all of them with large profit potential.

The ETF Profit Strategy Newsletter cuts through the noise  with technical, fundamental, and sentiment analysis helping our subscribers stay ahead of the market’s trend.  Your gut is telling you housing has topped, the charts are backing it up, and the fundamentals continue to deteriorate.  Until further notice, the better opportunities are thus on the short side.