September 12th, 2012

Fundamentals Trumped Technicals in XHB; Avoid Mistake in XLF

I could kick myself.  I allowed what people said was the fundamental realty get in the way of clear contrary picture in the charts and it cost me a bundle.  Not real dollars but only an “opportunity cost” for not having put my money to work there; but it hurt almost as much regardless.  I’m talking about the near perfect bottom reversal patterns that most home builders were building over the past three years and from which most broke out during the first quarter.

At the end of 2010, the home ownership affordability index (the number of Americans who could afford purchasing a home) was nearly the highest ever recorded.  According to a February 2011 RISMedia report:

“Nationwide housing affordability during the fourth quarter of 2010 rose to its highest level in the 20 years since it has been measured, according to National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) data. The HOI indicated that 73.9% of all new and existing homes sold in the fourth quarter of 2010 were affordable to families earning the national median income of $64,400. The record-setting index for the fourth quarter surpassed the previous high of 72.5% set during the first quarter of 2009 and marked the eighth consecutive quarter that the index has been above 70%. Until 2009, the HOI rarely topped 65% and never reached 70%.”

And yet, most of the talking heads and business media throughout 2011 and 2012 continued to look at home prices and sales statistics and wonder whether and when housing would hit bottom.  For example, USNews on April 26 reported:

Is the housing market in good shape or is it retreating back into recession territory? That’s the question on many observers’ minds as they try to sift through several reports this week that gave a somewhat murky picture of the state of the housing market…..Just this week, the widely followed Case-Shiller Home Price Index showed that values continued to erode in many metropolitan areas, with prices falling to a near-decade low nationally. Several cities registered new post-crisis lows on the index, further evidence that the “housing market bottom” remains elusive.Sales of new homes also disappointed this week, dropping more than 7 percent in March after a healthy gain in February. Overall, sales are still way short of the 700,000 or so units experts consider evidence of a “healthy” housing market.

So I continued to be leery of the home building stocks even though I’d been following and writing about them for some time.  Way back in May 2011 I called homebuilders and financial stocks the economy’s missing fourth wheel saying “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.”  I reposted that blog in January 2012 saying “If those groups [homebuilders and financials] start advancing this time, the rest of the market may not be much far behind.”

I must confess I was scared off by the various fundamentalist-based talking heads who kept looking at the trees (i.e., home prices and sales statistics) and therefore couldn’t see the forest (gaining momentum in homebuilding stocks).  I should have stuck with the charts and jumped on the unbelievable, steady move in homebuilding stocks which are up 45% this year, about the most of any industry group:

Last month I wrote that money flow is beginning to be “directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.”  I can report that XLF is making progress in its base-building and edging closer to the breakout level:

I missed out on that very clear-cut opportunity but don’t plan to miss the new one in the financials.


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