What’s Ahead For Housing Stocks?

homebuildersDouglas Davenport: The stock-market rally over the past two weeks may have come as a surprise to many investors. But what’s even more surprising is the outperformance of housing stocks.

The iShares U.S. Home Construction ETF (NYSEARCA:ITB) has jumped 5 percent since Aug. 27, beating the 3 percent advance by the benchmark S&P 500 in the same period.

So what’s going on? Is this a signal that real estate stocks are turning around after being pummeled during the financial crisis? Technical analysis provides what I believe is a definitive answer to that question.

A Classis ‘Oversold Bounce’

Based on the chart below, it’s clear to me that the recent strength in the housing sector is nothing more than what’s called an oversold bounce.


Click for larger version

To understand what’s happening now, we have to look at the historical performance of housing stocks. For about 18 months starting at the beginning of last year, the iShares U.S. Home Construction ETF was on a tear. In January 2012, we saw what’s called a golden cross, when the blue 50-day moving average crossed above the red 200-day moving average line.

If you had invested in ITB at that point, you would have doubled your money. But earlier this year, a change took place. While ITB continued to make higher highs into May, its performance relative to the S&P 500 — the second line from the bottom in the above chart — remained flat.

That type of divergence is considered very bearish, and sure enough, ITB gapped down in June, falling through its 200-day moving average.

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