This article originally appeared earlier today on ETF Profits.
The housing index has turned an important bullish corner and may have finally put the 2007 housing crisis in the rearview mirror. But we caution traders on looking at the group as anything other than a short-term trade at this point. The underlying demographics for the housing industry have tipped in the sector's favor, and the supply-demand dynamic is becoming favorable for home builders. But, any meaningful rise in asset prices is driven by liquidity, and housing lacks a liquidity driver.
The banks simply will not invest in housing and mortgages in anything approaching a speculative manner for at least another generation. The scars from the housing crisis run deep, and the situation is similar to the 'tech wreck' and the long-term bearish picture following the technology collapse. The housing sector could generate some profitable surges as the group recovers, but we doubt a sustained uptrend is in the cards for the group.
The S&P housing index has trended higher and broken out above resistance. The index has consolidated the breakout and looks ready to make another push to the upside. This short-term technical picture is bullish and offensive in nature.
The weekly chart for the group has seen prices push out to the upside and clear resistance at the upper end of a large bullish base formation. The multi-year base started in 2008, following the 2007 collapse in prices, and carried through to this year. The breakout from this base suggests that the sector could experience a run-up in prices in the short-term, but we doubt the group has any chance of returning to its former glory.
The sector has managed to hold flat relative strength vs. the S&P 500, which is a bullish change from the chronic relative underperformance the sector has experienced since the start of the housing crisis. The monthly chart for the housing sector has broken above the long-term downtrend line in the semi-long price chart after reaching a long-term monthly oversold condition at the market lows in 2008 to 2009. The confluence of bullish technical changes across all three time frames suggests that the potential exists for a solid short-term trade on the upside in this group for aggressive bulls.
Traders seem willing to start talking about some bullish fundamental dynamics created by demographics and the approaching supply-demand shortfall created by the dearth of building activity since 2007, and sentiment is turning positive. We believe this could create an updraft in prices for the sector, but we doubt we'll see a full recovery any time soon.
The SPDR S&P Homebuilding ETF (XHB) (XTF rated 9.3) is a large and liquid ETF, which is the preferred trading vehicle here. Traders can enter the minor pullback within the daily uptrend in XHB with a long trade at $20 and look for a continuation of the short-term trend following the breakout from the weekly base formation. A breakdown below the broken resistance/support line would suggest the bulls have lost some traction and the group may struggle a bit more. Use a confirmed break of support at $18 as a stop loss. We see a profitable short-term trade here, but traders should avoid looking for a more sustained move to the upside at this time and simply take advantage of the bullish swing in sentiment and the upside traction the group has at the moment.
