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Housing Stocks are Poised for a Correction

David Becker
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www.iforex.com

It’s been difficult to get a handle on housing stocks, even though prices for stocks in this sector have moved to the upper end of the range. Stocks of homebuilders have benefited recently but economic data which included today’s pending homes sales data does not support a robust housing recovery. Housing has seen a strong comeback since hitting lows during the financial crisis but this year many of the homebuilders have failed to rally.

Earlier today the National Association of Homebuilder released their pending homes sales report. This report tracks signed contracts which can be altered prior to closing. Pending homes sales declined in October by 0.6% compared to the 1% gain expected by economists. Pending home sales were down 2.2% on year over year, worse than expectations for a 1.1% fall. September’s figures was revised up to show a 4.6% fall, compared to an initial reading of a 5.6% monthly fall.

Pending home sales is generally a leading indicator of future existing and new home sales. The caveat of a revision given that these are contracts only reflects additional negative news in the sector. Monday’s negative print is a bearish sign which could further erode this sector.

The Philadelphia housing sector index which many ETF’s are based on declined nearly 1% on Monday. The index is now at the top end of the recent range and has not participated in the recent rally as compared to the broader indices. Momentum on the HGX index is negative with the MACD generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The negative outlook could put the index back to the bottom end of the current range at 177.

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