foxex: On the Rebound

Chart Advisor | Focus on the Price

Thursday, January 23, 2020

1. Market rebounds as homebuilders surge

2. Record new home starts elevate this group

3. Falling interest rates contribute to homebuilder trend

Market Moves

Though broad indexes fluctuated significantly in the first half-hour of the session, stocks spent most of the day rising. So much so that the Nasdaq 100 (NDX) managed to close higher than yesterday, setting yet another historic new high for a close. The S&P 500 (SPX) and the Dow Jones Industrial Average (DJX) closed nearly unchanged.

However, while the indexes were fluctuating, the homebuilder industry group was surging, building on an upward trend the group established late last summer. The chart below shows how stocks in this industry group rose on news earlier this week that housing starts hit their highest mark in the decade. As a result, State Street's S&P Homebuilder index ETF (XHB) is currently outperforming Invesco's Nasdaq 100 ETF (QQQ) so far this year (no small feat).

Record New Home Starts Elevate this Group

Since U.S. homebuilders began building well over a million new homes in December alone, it's worth taking note of the stocks driving the group higher. The chart below details several prominent homebuilding companies including D.R.Horton (DHI), Toll Brothers (TOL), KB Home (KBH), Pulte Group (PHM), and Lennar (LEN). One additional company, Masco (MAS) is included in this chart because it represents construction and equipment companies likely to benefit from this trend.

The importance of this chart, beyond the interesting possibility of finding stocks on the rise, is that this industry continues to be healthy, and that is an important indicator for nervous investors. With stocks rising at such a fast pace over the last year, many investors are worried whether the market might crash soon. Unlike the conditions in 2007, however, the homebuilding industry remains strong, mortgages remain affordable, and banks are not running into trouble with mortgage-backed securities. It is quite possible that a new surge in the homebuilder sector implies that stocks may still have room to continue higher in 2020.

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Falling Interest Rates Contribute to Homebuilder Trend

One of the better reasons that housing may continue to be an attractive investment is that the rate on the 10-year Treasury note (TNX) has trended lower. This rate is highly influential to mortgage rates, and as it drifts lower it spells greater affordability to home buyers. Two companies that have yet to rise significantly from their lackluster performance over the past quarter are likely to benefit significantly from this development, Home Depot (HD) and Lowe's (LOW). The chart below shows how an equal-weight portfolio of these two stocks compares to the S&P 500 index ETF (SPY) so far this year.

The Bottom Line

Stocks fluctuated lower at the open, rebounding throughout the day to close nearly unchanged (though the Nasdaq 100 gained a new high close). Homebuilders surged higher today, regaining a trend they started several months ago. Interest rates for mortgages are likely to remain low. This signal of a healthy investing environment should give hope to bullish investors.