No bottom in sight for housing | The Mesh Report

No bottom in sight for housing

Christian Tharp, CMT July 15, 2010 0

Well, it seems like the news on housing just keeps getting better. Yesterday the Mortgage Bankers Association (MBA) reported that the number of mortgage applications for home purchases had dropped to its lowest level in 14 years last week. Application volume for mortgages fell a seasonally adjusted 3.1% for the week ending July 9, compared with the week before, pushing volume to its lowest level since December 1996 according to the MBA. Now, I’m not sure what all that means for the future of housing, but it sure doesn’t sound good!

According to the MBA’s weekly survey, applications for mortgage refinancing fell a non-seasonally adjusted 2.9% for the week ending July 9, compared with the week before. Also, refinance applications were almost 79% of all applications. The MBA survey covers about half of all U.S. retail residential mortgage applications and has been conducted since 1990.

I can think of one possible reason for the plunge in purchase applications: The disappearance of the home-buyer tax credit? It’s quite plausible that the tax credit pulled a lot of sales from future months into the recent past, thus we’re losing would-be home sales now.

Another note of interest: The home-buyer tax credit expired at the end of April, right when the stock market started it’s current sell off. Coincidence?

Below is a chart of the XHB that I posted last month when new and existing home sales dropped to record lows. The XHB is the SPDR Homebuilders ETF. This ETF is a way for investors to invest in the housing sector, somewhat similar to a mutual fund. Specifically, this ETF is a collective investment in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF is also a great way to gauge the market’s “thoughts” on the housing market. As you can see, the market seemed to have been already anticipating the wonderful housing news we’ve been getting as of late.

XHB – 1 YR (As of June)

Now, take a look at an updated view of the XHB:

XHB – 1 YR

I made notation of when I showed the first chart and my belief that there was a short opportunity on this ETF, or on individual home building/retail stocks. Well, doesn’t it appear that there might be another chance to enter a short position now? On the other hand, what would it tell you if the XHB breaks through the down trending resistance line (red) that I have shown on both charts?

The Tale of the Tape: The XHB had broken down from its up trending support (blue) back in the beginning of June, which pointed toward lower prices. That has in fact happened. Now, the XHB has a strong down resistance line (red), which it is presently sitting at. As with the last time the XHB hit that resistance, the highest probability trade at this time would be to short either the XHB or individual homebuilder stocks such as TOL, LEN, KBH or others. You could also look to short housing retailers such as TSCO. If you decide to short the XHB itself for a more conservative trade, you would want to set a stop above that resistance line. If instead the XHB were to break above that resistance, you could then start looking for long positions in the same stocks or the XHB!

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT

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