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Housing Report

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The National Association of Realtors reported this morning that home sales slipped from January's record levels. Nevertheless, sales remained very strong during February. Existing home sales fell by 2.8 percent from January's levels to a 5.88 million annual rate. January's rate of 6.05 million annual unit growth was an all-time record, making February's number the second highest rate.

The positive housing data, however, was not well-received by the housing stocks. We saw a similar pattern in last week's session. So what gives?

The thinking in the housing sector is that all the good news is already discounted in the equities. That is, there's no where left to go but down. Plus, the housing stocks, while on an absolute valuation are cheap, are trading near historic premiums.

More importantly, perhaps, is the potential for rising short- term rates, which would in turn lift mortgage rates. The mortgage market is, of course, the end-market for housing stocks. Naturally, higher mortgage rates would reduce the demand for housing. While mortgage rates have remained stable and, in fact, aren't too far off from the record lows set last September, the potential for a rise in consumer borrowing rates is what's adversely impacting the housing stocks.

The Dow Jones U.S. Home Construction Index ($DJUSHB) is a convenient way of tracking the housing stocks. The index has been one of the stronger in the market since last September, but that trend changed last week. For the first time since last November, the $DJUSHB went into a column of Os on its relative strength chart versus the market. Granted, in the bigger scheme of things, the $DJUSHB is still very strong versus the S&P 500 (SPX.X). Nevertheless, last week's reversal into under performance may be the beginning of a bigger trend.

Housing versus The Market

In addition to last week's give-up in relative strength, the $DJUSHB gave its first blow-off move to the downside in about six months. The sell signal that began with the break below the 356 level gave way to further weakness, which was followed by a big reversal last Friday. A print at 340.00 would have the index bag into a column of Os, or a situation in which supply outstrips demand.

Significant Sell-Off

It's important to take into account the little things, such as the fact that the $DJUSHB is still well above its bullish support line. In other words, the sector is still relatively strong as the relative strength readings reinforce. But, if you're bearish on this group of stocks, then the recent developments may give some conviction to the downside.

Here are some of the stocks to watch in the housing sector:

Centex        (NYSE:CTX)
Pulte Homes   (NYSE:PHM)
Beazer        (NYSE:BZH)
D.R. Horton   (NYSE:DHI)
KB Homes      (NYSE:KBH)
Toll Brothers (NYSE:TOL)
Lennar        (NYSE:LEN)
Clayton Homes (NYSE:CMH)
MDC Holdings  (NYSE:MDC)
Ryland        (NYSE:RYL)

Eric Utley
Option Investor

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