XHB and Facebook – 2 Buy Signals

Facebook

The following analysis was published in the October 28 Profit Radar Report:

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Facebook has been ‘wedging’ lower. It is now at triple support, shows a tiny bullish divergence, and cycles are turning strongly bullish. Upon completion, wedges like this are often completely retraced, which means the up side target is around 188. Aggressive investors may choose to buy Facebook.”

Facebook rallied as much as 12.49% since Monday’s low. Cycles continue higher, and (FB) should rally towards and perhaps beyond 188.

SPDR S&P 500 Homebuilders ETF (XHB)

The following analysis was published in the October 21 Profit Radar Report:

The SPDR S&P Homebuilders ETF (XHB) is one of the most hated ETFs right now. In September XHB languished in over-sold territory for 10 consecutive days without bounce. Daily RSI-35 (not shown) is the most over-sold since August 8, 2011. Trade is currently below two (red) long-term trend lines. Trend channel support is around 33.13.There are no bullish divergences. In summary, XHB is down 28.75% since January, and is over-sold enough to spark a powerful spike at any time. However, there are no bullish divergences indicative of a lasting low. Perhaps this will change by the time XHB reaches the black trend channel.”

October 28 Profit Radar Report:

XHB closed below the black trend channel on Friday, but with a bullish divergence. A move back inside the channel (above 32.90 on Monday) and above trend line resistance (33.25 and 33.70 on Monday) could unleash a strong bounce. Aggressive traders may buy accordingly.”

Since Monday’s low, XHB rallied as much as 7.95%. Based on sentiment and technicals, further gains are likely.

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Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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Quirky but Accurate Indicator: Housing Sector Troubles Likely to Continue

Sometimes the oddest correlations make the best forward-looking indicators. This is certainly the case with lumber and the housing market. Here’s what this odd but accurate indicator ‘sees’ ahead for U.S. real estate.

Several times in the past we’ve looked at the correlation between lumber and housing – related ETF: iShares US Real Estate ETF (NYSEArca: IYR).

It’s an off the wall kind of an indicator, but it’s proven more accurate than any other housing indicator.

To get the correlation right, we need to set lumber futures forward by about 14 months.

The chart below does just that, as it plots lumber against the PHLX Housing Sector Index.

Lumber 514

As the gray oval on the right shows, lumber saw a big pop and drop in 2012/2013.

The two gray ovals to the left illustrate that the magnitude of such sizeable pops and drops tends to appear muted in the housing sector, nevertheless it suggested an eventual slowing of the housing market.

Lumber is currently at an interesting juncture, as lumber prices were unable to break above resistance and just fell to test support.

As of right now, lumber suggests that the housing market is not ‘out of the woods’. The housing blues may start all over if support for lumber fails.

This would not only affect multi-billion dollar ETFs like the Vanguard REIT ETF (NYSEArca: VNQ), or SPDR Dow Jones REIT ETF (NYSEArca: RWR), but also millions of Americans.

A proprietary analysis of supply and demand for the SDPR S&P Homebuilders ETF (NYSEArca: XHB) also shows that demand for homebuilding stocks is deteriorating.

 

Is the Housing and Real Estate Recovery Here to Stay?

The S&P Case/Shiller Composite 20 Home Price Index just saw its sixth consecutive monthly increase (see chart below).

The index is a composite index of the home price index for 20 major metropolitan areas in the US. Many analysts look at the 6-month recovery (short red “tail”) and are ready to pronounce a permanent bottom for the housing and real estate market.

Obviously, this would be bullish for the iShares Dow Jones US Real Estate ETF (IYR), SPDR S&P Homebuilders ETF (XHB), and the overall real estate sector. But does this recovery have legs?

An Odd but Effective Indicator

It’s said that the end justifies the means and that may be the case with the quirky forecasting tool I’m about to introduce. This indicator has to do with lumber prices.

Lumber is a key component for every house and seems to play a role as a leading indicator. It seems that lumber prices tend to rise about a year before the housing sector.

The chart below plots lumber futures against the PHLX Housing Sector (HGX – not an ETF). HGX includes companies like Pulte Group, Standard Pacific, KB Home, DR Horton, Fidelity National Financial, Weyerhaeuser, etc.). I have set the lumber price forward 1 year to capture lumber’s leading indicator role.

The red arrows show the correlation between major highs and lows. Based on the tilt of the red arrows it might be even more appropriate to increase the lead from 12 to 15 months. Regardless, up until mid-2009 the correlation worked like a charm.

Enjoy it While you Can

Since mid-2009 the gyrations of lumber prices have been more pronounced and less correlated compared to the housing sector. I’m not sure why (massive monetary manipulation by the Fed likely plays a role). Assuming that the directional analogy will continue (or resume), lumber prices suggest that the housing recovery will last into mid-2013.

As of late, lumber prices have fallen through trend line support (black line), which is a bearish development. It will take time to determine just how bearish, but lumber futures suggest more weakness in mid-2013.

A resumption of the housing slump about a year from now would certainly harmonize well with our overall forecast for the stock market.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.