Wednesday, February 6, 2008

Will the Homebuilder's Rebound Continue?

One of the first blogs I read when I got back from vacation was Afraid to Trade. He had a post up about Pulte home's rebound, which got me thinking about the homebuilder's sector. So, let's look at the chart to see what it says.

The yearly chart looks terrible. Prices are in a clear general downtrend. Most importantly, the 200 day SMA is in a downtrend, which is very bearish.

However, notice the following on the three month chart.

-- Prices are above all the short-term SMAs

-- The 10 day SMA has moved through the 20 and 50 SMA

-- The 20 day SMA has moved through the 50 day SMA

-- The shorter SMAs are above the longer SMAs

-- All three SMAs are moving higher.

-- Volume has been impressively strong.

All of the above points indicate a technical turnaround may be in play.

Now, the question is will this last?

First, note on the two year chart that the XHB has fallen pretty hard for the last two years. At some point, prices hit a "there is no way prices can go lower" point. Simply put -- securities can't get cheaper. Perhaps the homebuilders are at this point right now.

However, the rally is largely in response to the Fed cutting interest rates. The real question now becomes, "will lower interest rates save the housing market, or is there more pain ahead?"

Right now lenders are tightening their lending standards across the board. That does not bode well for housing. In addition, consider that job growth is weakening, which will lower consumer confidence which will decrease consumer's desire for expensive items like homes. Also consider the large glut of existing homes on the market and the declining value of homes according to the Case Schiller index and you have a recipe for a very strong bear argument. I will add that I am personally surprised we haven't seen a major bankruptcy in the homebuilder sector yet.

However, there is also the very good counter-argument that prices are simply as low as they will go, barring a bankruptcy in the sector. That is always a possibility.