Home Builders Have Been Favorites

While the interest rates were dropping, home builders have behaved wonderfully as homes became more affordable. A couple of things happened this week, that at least puts some caution into the equation.

  • Bond yields started marking higher highs and lows
  • Home builder momentum rolled over slightly
  • Home Improvement retailers momentum rolled over slightly

First of all, this move in bond yields looks very significant. Notice the full stochastic indicator (Full STO) has been below the 50% level for a year. This week, it pushed back higher which is one of the first clues to show on my weekly chart style. The relative strength compared to the S&P 500 is in purple. It is also breaking above the downtrend. It has not started to make higher highs on that indicator panel yet, but the yields are no longer underperforming comparatively.

On the yield panel, we now have a higher low and a higher high in place, which is typically the definition of an uptrend. The PPO momentum indicator has crossed the signal line from a very low level for the first time. That indicator grouping suggests to me, a major change in trend for yields.

One of the charts I watch has been the home construction industry group. On the lower panel, I have posted the ten-year treasury price ($UST), in the chart with a zigzag indicator showing the major trend reversal. While the tops and bottoms don’t correlate to the day, the charts definitely enjoy the same investing theme. Lower interest rates (higher bond prices as shown) help home construction. The trend indicator on the $UST has already reversed.

That leads us to look at the home improvement retailers like Home Depot and Lowes. Chartists have the advantage to see if these charts correlate.

Looking on the industry chart, we can see the industry group does not correlate as well to the $UST chart, as the year 2018 was also a weak year for the overall stock market. With the PPO momentum indicator looking stretched to the high side and close to crossing below the signal line, it might be worth watching to capture maximum profits.

It appears to be an opportune time to take profits in home builders and move to a group that likes rising interest rates and falling bond prices. Home Improvement retailers might be able to continue the ride.