Fundamental And Technical Alignment?
From a probability perspective, the best investment ideas tend to be those
with improving fundamentals and improving technicals (charts). On the fundamental
side, the news has been improving for homebuilders. From Fox
Business:
D.R. Horton Inc, the largest U.S. homebuilder, reported better-than-expected
quarterly revenue and said orders jumped 38 percent, suggesting an uptick
in housing demand. The company, which caters to people buying their first
or second homes, said the number of homes sold rose 25 percent to 8,612
in the fourth quarter ended Sept. 30....Luxury homebuilder Toll Brothers
Inc said on Monday its orders jumped in terms of both dollars and units
for the first time in four quarters.
From Laggard To Leader?
The weekly chart below shows the performance of homebuilders relative to the
S&P 500 Index. The trend turned against homebuilders in early March 2014.
Since the October low in stocks, rather than lagging, homebuilders have been
leading. The three steps required for a bullish trend change are nearing completion:
(1) a break of a trendline, (2) a higher low, and (3) a higher high. The weekly
higher high does not officially go into the books until this Friday, meaning
homebuilders still have some work to finish.
Similar improvement can be seen when comparing the performance of homebuilders
to a basket of bonds (AGG).
We would hope that investing in homebuilders would be better than a strategy
to short the S&P 500 (SH). Until recently, that was not the case as the
ITB:SH ratio was making a series of lower highs and lower lows (see chart below).
The trend is trying to turn in the favor of homebuilders.
How Do We Use All This?
Investing is about probabilities. The improving fundamental and technicals
in the housing sector tell us the odds of success in that sector are also improving.
It should be noted that even if the weekly trends continue and homebuilders
lead, that does not remove normal retracements and pullbacks from the equation.
The odds of good things happening in homebuilders are better today than they
were in early October. From a bigger picture perspective, the improvements
in the market's tolerance for risk outlined on October
31 and November
7 still apply.
