May 19th, 2011

Homebuilders and Financials: The Economy’s and Market’s Missing Wheel

Two Industry Groups stand in the way of further market advances: financials and homebuilders.

Home building industry spokespeople go on CNBC regularly each time of the housing statistics are announced, like monthly sales, financing and refinancing, starts, or permits issued. And the spokespeople each time differentiate between the sales of new homes and resales, especially those that are in foreclosure or underwater; they also attempt to differentiate between national statistics which include negative information from extremely skewed markets like Las Vegas, Phoenix and Florida and the rest of the national housing market.

Discussed less frequently are conditions and prospects for banking, insurance, asset managers and the rest of the financial industry group. Since the bottom in 2009, I have believed the sector was a key to launching a true bull market:

  • On 3/20/09 in Financial Stocks are Laggards I wrote: “It’s often said that financial stocks are the Industry Group that leads the market out of the average Bear Market. In this case, however, the financials not only lead us into the Bear Market but they were the principal cause.
  • On 5/18/09 in XLF (Financial Sector ETF): What Now? I wrote: “XLF seems to be making what looks like the beginning of an inverse head-and-shoulder, a stock pattern that looks similar to the S&P 500 Index pattern….There’s only a one-in-four chance that XLF will be able to cross the resistance at the 13.00 neckline allowing it to move up to 17.00. It’s almost certain that 12-18 months from now XLF will be double what it is today [closed at 12.29 on that day], we just can’t say when.
  • On 6/7/2009 in XLF (Financial Sector ETF) = Market Health I wrote: “…the key to solidifying the market’s turn, to a true change in momentum from bear to bull is financial stocks starting to move up…..The financial sector is tied up with economic health, exchange value of the $US, interest rates and the health of the financial system itself. I’ll rest easier when I see the XLF successfully and with conviction cross above it’s neckline. “
  • On 9/16/10 in Housing and Finance: Two Superimposed Crises and Bear Markets I wrote: “[The] graph clearly depicts what I see as two coincidental and superimposed Crises the country has faced. We often see them merged into one continuous stream of bad news but, in reality, there was a Financial Crisis (impacting business) that was preceded by Housing Bubble and Bust (impacting consumers).” and inserted the following graph, now updated to last night’s close (click on image to enlarge):

A year later, while the rest of the economy has regained its footing enabling the market to push higher (up nearly 20% since then), those two industry groups are still stuck below significant resistance and unable to breakthrough and push significantly higher:

  • Homebuilders
  • Financials

If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.

Subscribe below or click here to learn more about help for navigating turbulent markets.