September 1, 2010
Home Builders: Beaten Down And Looking Up?

Sentiment surrounding home-builder stocks remains in the dumps, but some technicians and analysts are seeing glimmers of hope in the sector.

The National Association of Home Builders said Monday that home-builder confidence in August plunged to a 17-month low, at least partly due to a slumping labor market and broader concerns about the recovering economy.

The negative view surrounding housing is nothing new, but it has been particularly downbeat since April, when the home-buyer tax credit expired, and the SPDR S&P Homebuilders Select Industry Index exchange-traded fund (trading symbol XHB) topped out at $20.

The ETF has since significantly underperformed the broader market, falling 29% while the Standard & Poor's 500 index has declined 11%. After such a precipitous drop, the ETF is inching closer to some key support levels.

Katie Stockton, chief market technician at MKM Partners, wrote recently that the "risk/reward is currently favorable for the XHBs," as the recent pullback has brought the ETF closer to some areas of support.

She sees support in the $13.50 to $14 range, which is based on its November 2009 lows as well as a 50% retracement from the long-term uptrend. The XHB plunged to $8.05 in March 2009 and peaked at $20 this past April, putting the 50% retracement at about $14.

"The sentiment surrounding the group has been extremely negative, which we view as an opportunity to take advantage of recent weakness," Ms. Stockton said.

That mindset played out Monday, as XHB largely shrugged off the poor home-builder confidence and flitted between small gains and losses, before closing down four cents, or 0.3%, at $14.11.

Although sentiment may be downbeat for the sector, at least one analyst is optimistic about the prospects for a housing recovery.

Last week, Deutsche Bank analyst Nishu Sood said the housing market was getting closer to hitting a natural bottom.

In particular, Mr. Sood upgraded D.R. Horton, Ryland Group and Meritage Homes, noting that all three are focused on first-time buyers and have balance sheets that aren't as risky compared with their competitors.

This optimism comes, however, as the NAHB said its housing-market index fell to 13 in August, the lowest reading since March 2009. A reading above 50 indicates more builders view sales conditions positively. But it hasn't hit 50 in more than three years and fell to as low as eight in January 2009.

Phil Roth, chief technical strategist at Miller Tabak, said investors may be willing to shrug off poor data and, on a short-term basis, push housing stocks higher off such diminished levels. For XHB, he sees the first area of resistance in the $14.50 to $14.55 range and then again at $15.50.

But over the longer term, Mr. Roth expects housing stocks to continue lagging behind the broader market until the sector can display a plethora of positive data.

"Housing stocks are going to wallow around for a long time," Mr. Roth said. "It's unlikely you're going to see a sustained advance without considerable base building."

Source: The Wall Street Journal, August 16, 2010


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