This Chart Says ‘Sell Homebuilder Stocks!’
In my previous article,
I pointed out that overlaying charts gives traders and investors an advantage
by framing price movements in an historical context. Currently, the homebuilder
stock charts are showing a high correlation to the NASDAQ chart from 1995 –
2000. And if this relationship holds up, last week’s sharp correction could be
the beginning of the end for the blistering rise in housing stocks.
Using traditional technical analysis, the
homebuilding stocks, as represented by the Philadelphia Stock Exchange Housing
Index (HGX), are undergoing a sharp, but not unexpected, correction after a
strong move higher.
The index has undergone many similar corrections
since it began its advance in 2000. However, overlaying a composite of the
housing stocks with the NASDAQ chart from 2000 indicates that this correction
could turn into something more ominous. Specifically, the homebuilder stocks
seem to be tracing out a similar pattern to the NASDAQ bubble. The homebuilder
stocks have now advanced the same percentage as the NASDAQ advance from 1996 to
2000. In creating the following chart, I built a composite of housing stocks
using Toll Brothers (TOL), Ryland Group (RYL), KB Home (KBH) and DR Horton (DHI)
because the HGX Index was not launched until 2002. I also adjusted the NASDAQ
price ratio so it would be comparable to the housing composite on a percentage
basis.
In addition to the “bubble” chart correlation,
the housing stocks are also registering DeMark sell signals. The HGX index has
registered a TD Sequential â”