The stock-market rally over the past two weeks may have come as a surprise to many investors. But what’s even more surprising is the outperformance of housing stocks.
The iShares U.S. Home Construction ETF (ITB) has jumped 5 percent since Aug. 27, beating the 3 percent advance by the benchmark S&P 500 in the same period.
So what’s going on? Is this a signal that real estate stocks are turning around after being pummeled during the financial crisis? Technical analysis provides what I believe is a definitive answer to that question.
A Classis ‘Oversold Bounce’
Based on the chart below, it’s clear to me that the recent strength in the housing sector is nothing more than what’s called an oversold bounce.
To understand what’s happening now, we have to look at the historical performance of housing stocks. For about 18 months starting at the beginning of last year, the iShares U.S. Home Construction ETF was on a tear. In January 2012, we saw what’s called a golden cross, when the blue 50-day moving average crossed above the red 200-day moving average line.
If you had invested in ITB at that point, you would have doubled your money. But earlier this year, a change took place. While ITB continued to make higher highs into May, its performance relative to the S&P 500 — the second line from the bottom in the above chart — remained flat.
That type of divergence is considered very bearish, and sure enough, ITB gapped down in June, falling through its 200-day moving average.
|Since June, a new declining trend in housing stocks has taken hold.|
Since then, the signs for housing stocks have just gotten worse. Last month, ITB’s 50- and 200-day moving averages crossed each other in the opposite direction, known as a death cross. The ETF’s Relative Strength Index, or RSI, has been constrained within a depressed 30-60 range. And its moving average convergence divergence (MACD) line — at the bottom of the above chart — has remained below zero.
Housing stocks have made several unsuccessful attempts to turn things around over the past couple months. The 50-day moving average, which acted as strong support during the rally in 2012 and early 2013, has now become firm resistance.
What’s Ahead for Housing Stocks?
The rising trend enjoyed by housing stocks for a year and a half has now clearly been broken, and a new declining trend has taken hold. But high-flyers rarely die a sudden death. That’s why some investors are still betting on a rebound. They believe this is their opportunity to enter the market on the cheap. That speculation is the reason for ITB’s recent strength.
But I have little doubt this oversold rally is nearly over. ITB is once again butting up against resistance at its 50-day moving average, which should continue to hold firm, just as it has for the past three months.
I have some thoughts as to how stocks may perform if the Federal Reserve announces tomorrow that it will decrease its bond-buying program. Go to Money and Markets’ Facebook page to find out, and please let me know what you think about the Fed and the direction of stocks.