US Homebuilding Stocks Gave Early Signal of Housing Top and Housing Bottom

THIS IS WHY WE FOLLOW CHARTS ... We've been treated to a lot of bullish news on the housing sector over the last month. Builders broke ground on more homes during October. Residential construction rose last month at the highest rate in more than four years. Permits for new construction were 30% higher than a year ago. An index of builder's confidence hit a six-year high earlier this month. It was reported this morning that the Case-Shiller Home Price Index rose 3% for the sixth straight monthly gain in a row. That index is the most widely-followed barometer of the health of the housing industry. It peaked during the middle of 2006 and bottomed during the first quarter of this year. The main reason why we follow price charts is because they are leading indicators of any industry's fundamentals. And, once again, the charts spotted the housing recovery a lot sooner. Chart 1 plots the Dow Jones US Home Construction Index since 2000. The homebuilding index peaked during 2005 (nearly a year before the Case-Shiller index) and broke its multi-year up trendline during 2006 (red circle). That was a clear signal at the time that the housing boom was over. It took the investment community until late 2007 to acknowledge that.

HOUSING INDEX GAVE MAJOR BUY SIGNAL LAST JUNE... Chart 1 shows the home construction index hitting bottom in late 2008/ early 2009. It achieved a successful retest of that low during the second half of 2011 before breaking its major down trendline during that fourth quarter (green circle). More importantly, the housing index cleared its 2010 high during June which completed a major basing pattern and signalled a major new uptrend (solid circle). I've been writing bullish comments on the housing industry since the fourth quarter of last year based on that bullish chart pattern. It took the economic community nearly a year to acknowledge the improvement. Homebuilders have, in fact, been the strongest sector of the market during 2012, and correctly signaled that the housing industry was in recovery. Once again, the charts were early and the economic community late. I can't wait to see all of the buy recommendations being issued by Wall Street in the coming weeks. Meantime, the construction index has more than doubled in price since the fourth quarter of last year. That's why we follow charts. And why we prefer the market messages being given by charts rather than economic messages which are usually way behind the market.

Source: John Murphy's commentary on StockCharts