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Tom Peterson: Housing Index Looks Choppy

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Residential sales in pockets around the country are going sour unusually quickly.

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Editor's note: The following commentary is courtesy of Tom Peterson of Bulls Eye Research.

The Housing Index (HGX) has been pretty choppy the past few days as it continues to exhibit a rejection response to the resistance in the 540 -555 zone from September's trading.

The index is in a short-term rebound channel and it successfully tested the lower "demand" trendline this morning (so far). But it has lost momentum and is flashing a MACD warning signal. We are getting warning signals in housing related faves like the Williams Sisters (Williams Sonoma (WSM) and Sherwin Williams (SHW) also.

Residential sales in pockets around the country are going sour unusually quickly. Here's an article from Sacramento about housing there. This is not isolated as we see from recent reductions in forecasts from companies such as Toll Brothers (TOL). There is a story about Toll's 2006 forecast here.

We continue to think investors have to be very careful in this group now. The best part of the rebound off the October lows has been seen. There are some decent positive divergences in many of the individual homebuilder names recently which should give bulls added hope. But we need to protect our gains in the group against a downside reversal. The best thing the homebuilders could do now is consolidate for a few weeks while gaining net new accumulation (a.k.a. similar idea to most measures of positive money flow). If they slide back into distribution mode again, then a re-test of the October lows is likely, and the weakest of the group - the ones that have hardly bounced in recent weeks - will probably make lower lows.

Here are two charts to illustrate.

Tom Peterson
Bulls Eye Research

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