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Are Magazine Covers Sending a Bearish Signal for Housing Stocks?

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The overall sentiment on housing stocks is much more optimistic than it was earlier this decade.

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Housing is one group that simply hasn't gotten it done this year, with most of the stocks actually down on the year. This comes on the heels of it being one of the best groups the past few years. Last year, it was a group that I had a lot of success trading calls on, as they usually went up. Most of the names were up well over 100% on the year, so sometimes it pays to take the easy trade.

Now things, they are a-changin'.

What stands out the most on housing stocks here is that the data continues to be strong. Also my firm has seen a good deal of optimism toward the group. I remember noting housing as one of my favorite sectors heading into 2011 and nearly always, I'd get back a list of reasons I was wrong. We're not seeing that anymore.

Remember, economic data doesn't lead stocks. In fact, nearly always, it is the stocks that lead the economic data, meaning that all of the strong data we're seeing now was probably already priced in. Housing stocks were long ago telling us the housing rebound was real, when most economists were doubting the recovering was nothing more than a bounce off the bottom.

Also, in the options market, we've noticed continued heavy call buying on the various names most of this year. Again, this is drastically different than what we saw the past two years.

Then just today, I noticed a bullish Wall Street Journal article on housing stocks, which said, "With the shares having taken a beating since May, it might be time to buy." That stands out, given the very weak price action.

Think about it: Nearly any time someone notes positives on the economy, they cite housing (I know this because I do it as well). Lastly, throw in this over-the-top cover from Kiplinger's and the contrarian play on housing could be over.



Seriously, a house with money coming out of it? Wait, that sounds familiar. BusinessWeek did the exact same thing back in February!



Now compare that sentiment with what we saw in late 2010. Back then, it was in vogue to totally reconsider even owning a home! That is about a bullish statement as you'll ever find and was one big reason my firm was bullish on housing back in 2011 and 2012.



So what does it all mean here and now? I'm not saying that this is a huge sell signal on housing, but the easy money has been made. Once everyone catches onto a trend, it is much tougher to get much out of it.

Now check out this chart of the iShares Dow Jones US Home Construction ETF (NYSEARCA:ITB), a pure housing stock ETF. It is making a picture perfect head-and-shoulders topping pattern. Should this resolve lower, it could result in significantly lower prices.



One thing I'll note is that during the past few years whenever we've seen some of these bearish technical patterns, nearly everyone picks up on them. Then sure enough, the market bounces hard. If more and more traders start talking about the pattern above, be open to a sharp rebound.

The question I am continually asking myself is: With the overall sentiment on housing stocks much more optimistic now, will this pattern give way to much lower prices? I honestly don't know, but wouldn't bet against if that neckline is violated.

This article by Ryan Detrick, CMT, was originally published on Schaeffer's Investment Research.

Below, find some more great content from Schaeffer's Investment Research:


Daily Game Plan – Early Weakness Finds Buyers

Analyst Downgrades: Netflix, Inc. (NFLX), Target Corporation (TGT), and Crocs, Inc. (CROX)

F5 Networks, Inc. (FFIV) Call Buyers Anticipate More Gains


Twitter: @schaeffers
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