Market Wrap Up March 03/05

by Martin Goldberg

Divergences in the Real Estate Related Stocks
“This Time it Really IS Different”

Last week the homebuilder’s vertical and decisive rally has many wondering if indeed, trees really do grow to the sky because the performance of these stocks has been phenomenal. For example, NVR Homes was recognized in Tuesday’s Wall Street Journal as the top performing stock over the last 5 years. So will the homebuilding stocks keep going up forever? While it seems that one cannot rule out this potential, divergences apparent in many housing-related technical charts may be suggesting that we are at or near a top in the homebuilders’ index. I will illustrate tonight why these divergences warrant attention and may be signaling that the latest rally in homebuilding stocks is probably unsustainable.

Home Finance Fails to Follow Through (So Far)

The bull market in the homebuilder’s index was accompanied by a bull market in related companies such as Home Furnishers and Home Finance. While the furnishers have lagged and sometimes faltered over the last few years, they recovered and generally appreciated concurrently with the homebuilders. Accordingly, occasional failing action in the home furnishers has proven to be a false death knoll for the homebuilder stocks.

Similarly, the Home Finance sector has traced a similar pattern as the homebuilders throughout the long term housing bull market but they are currently diverging from the builders’ index. Some key stocks within the index are technically weak and faltering. This is best illustrated in the 5-year weekly charts of the homebuilding index and a high-flying leader of the Dow Jones Home Finance Index - Countrywide Financial Corp. (CFC). As you can see in the chart below, CFC has traced a similar bull pattern as the homebuilding index for the last 5 years.

Dow Jones Homebuilding Index and Countrywide Financial 5-Yr. Weekly

However, recently there appears to be an important divergence as shown in the 6-month chart. While the homebuilding index has surged once again, the home finance companies, as typified by Countrywide, have faltered.

Dow Jones Homebuilding Index and Countrywide Financial 6-mo. Weekly

A closer look at the 6-month daily chart of Countrywide shows weakness. As of Wednesday’s close, CFC failed to close above resistance and its 200 day moving average. Wednesday, Countrywide traded over twice as many shares as in a typical day.

Similar nonconformance can be found in other home finance companies such as New Century Financial (NEW) and Accredited Home Lenders (LEND), and we all know the problems experienced in *.*-government entities, Fannie Mae (FNM) and Freddy Mac (FRE). In spite of the bearish characteristics of the CFC chart, it would not be wise to take a large position or any position without a stop. This is apparent by examining the recent action in Redwood Trust (RWT), a company in a similar business that also benefited from a boom in the housing market. Below is the one year daily chart showing a broken plunging neckline followed by a whipsaw.

Although short sellers recently got whipped, the overall bearish pattern of charts such as RWT could be signaling an eminent end to the homebuilders’ bull market.

The chart of New Century Financial Corp. also typifies the faltering of formerly high-flying mortgage finance companies.

Illiquid Homebuilding Leader Now a Party Wallflower

Although the homebuilder NVR Inc. was the 5-year stock market leader as highlighted by The Journal, it was far from the life of the party in last week’s homebuilder rally. NVR is different from other homebuilding stocks in that it is much more illiquid than the others. For example, the turnover rate of a floating share of NVR is about 94 days compared to Beazer Homes which has a turnover rate of only 19.5 days. This suggests that the $800/share NVR is less likely to trade on fast money whims. The chart below illustrates the action of NVR homes compared to the Dow Jones US Homebuilding Index over the last year.

The chart of NVR compared to the rest of the homebuilding index clearly indicates that NVR has been decisively lagging the index since early December. The lagging of this former leading stock suggests that the previous sector rallies were based on fundamentals, the most important component of stocks in the latest rally is liquidity and not fundamentals. Perhaps buyers of the homebuilding stocks are now buying in anticipation of the next positive press release or stock split. However, it would also not be prudent to read too much into NVR’s lagging at the moment. The technical chart of NVR viewed alone may be quite bullish, and it could be basing for yet another run-up.

Is It Different This Time?

Homebuilder stocks appeared on the ropes several times over the last year, yet is anything different this time? The new trend of interest and mortgage rates is now “UP.” Although this has occurred before in the last two years, the behavior of the stocks in the home finance sector has failed to confirm the bearish outlook for the bond market…until recently. The homebuilding stock whose 5-year performance suggests it is in the most intelligent hands, NVR, failed to participate in the latest good news rally, and is lagging the rest of the homebuilding stocks in the short term. This all suggests the latest surge in both homebuilding fundamentals and stocks is being driven by a rush to beat rising interest rates. While it may be too early to sell or short real estate-related stocks, it appears that the bull market in housing is probably drawing to a close. What would change this outlook? A decisive rally in the home finance sector stocks such as Countrywide (CFC), Accredited Home Lenders (LEND), Redwood Trust (RWT), Washington Mutual (WM), New Century Financial (NEW) Fannie Mae (FNM), and Freddie Mac (FRE) would confirm the bullish outlook in the homebuilders. Yet with many of their charts suffering serious technical damage, this appears to be unlikely.

Today’s Market – Nasdaq 100 Trails Again

The stock market was fairly quiet today trading pretty much even except for the Nasdaq 100 which was down about 1%. The other indices traded fairly close to even in spite of the fact that Oil traded above $55/barrel today. The 6 month daily chart of the Nasdaq 100 shows some clearly bearish implications.

The Nasdaq 100 is having difficulty closing above its much watched 50-day moving average. In addition, the relative price of the Nasdaq 100 versus the S&P 500 closed at a new low today. While it would appear on the surface that the Nasdaq 100 is likely to lead the market lower, consider that last August when oil peaked and then corrected to the downside, the stock market rally was led by the Nasdaq 100. There is no reason to believe that this cannot happen again. It is also relevant that even though oil and commodities are showing decisively bullish action, the stock market indices are holding their own. A long overdue technical correction in oil (which is way overbought), could provide the stock market with a reason to rally. And for that matter, what’s a good stock market rally without the Nasdaq 100?

Oil broke above a former resistance line, closing over $53.00 per barrel, way off its intraday high

Tomorrow will know if this is a whipsaw or if this former resistance becomes a support line. You don’t have to be a master chart reader to see that something important is going on in commodities over the last couple of weeks.

In today’s bond market we had another $0.30 resolution of the conundrum, as the 30-year note closed down, and the 10-year note finished little changed. Here’s the chart of the 30-year note.

Following is the daily chart of the exchange traded 7 to 10 year note.

As you can see, the mid-term bond is at a serious technical support level at the same time that it is oversold. A prediction: With tomorrow’s unemployment statistics being released by the government, it fits that the numbers will miss analyst’s lofty expectation while also showing some growth in jobs nevertheless. This will serve to both support the bond market, while providing the fuel for consumers to maintain their “confidence,” and support stocks. To this point in time, that’s how the govt. statistics have played out for the most part. In my view, consumers are too confident and they are showing it with their reckless spending. But what the heck, they are only emulating their leaders and esteemed experts who are encouraging this reckless behavior. Most consumers are in debt 2 ways: via the deficit, and their own debt.

Gold was down $3, and silver was down $0.11, while the XAU and HUI were each down more than 1%. They are still in a bull market.

Have a great evening.

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net