Friday, August 28, 2009

Housing bottoming but recovery still uncertain

Bloomberg recent reported that Homebuilders are buying land after years of inventory cuts. Coupled with a buoyant new home sales report, some investors have concluded that housing has bottomed and is poised to rebound.

Wait for the relative breakout
The chart below shows the S&P 500 Homebuilders Index relative to the S&P 500. Relative to the S&P 500, the Homebuilding group is currently undergoing a basing process but calls for an upturn may be premature. Technically, the group needs to break out of its relative trading before we can definitely call for a recovery.

My gut feel tells me that sentiment isn’t quite washed out for an upturn. We need a magazine cover style capitulation, or for the popular media to really jump on the story. Here is an example from Britain’s housing bust from the 1980s:

Bottoms are a process
This form of relative analysis isn't new. I posted on the bottoming process undergone by the group last August and again in January. I suggest that investors shouldn’t get overly enthusiastic in anticipation of a rebound. We need to watch and wait for the relative breakout before sounding the all-clear.

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