06/25/14   Housing Heading Higher

Editor’s Corner

Ron Rowland

New home sales surged 18.6% in May versus April levels, coming in at a pace of 504,000 units per year.  These figures are indeed impressive and represent the highest rate since mid-2008.  However, they may not be as dramatic as they first seem.  Further analysis reveals this just puts the recovery back on trend – nothing more – although that might be all that is needed.

On a year-over-year basis, new home sales registered a 16.9% gain, which coincides with the 15.7% annualized improvement of the recovery that commenced in early 2011.  New home sales began to turn up three-and-a-half years ago, following a horrendous three-year plunge.  The pace of the recovery was strong and steady for the first two years, but then it started to unravel in early 2013.  It tried to rebound later that year only to stall out again this year.  If you ignore the volatile data points of the past twelve months, then the May figures fall right in line with the previous trend.

One month of data can easily be skewed, so analysts are already waiting to see the June and July figures for confirmation.  In fact, the Commerce Department says the May figure represents the largest one-month jump in more than 22 years, but it has a margin of error of plus or minus 17.3 percentage points.  How’s that for confidence?  Additionally, the annual rate peaked at about 1.4 million units in 2005, so as impressive as the May figure seems on the surface, it is still down about 64% from the peak.

On Monday, the National Association of Realtors released its existing-home sales report, which showed a 4.9% rise to 4.89 million units annually.  This follows a rise in April and marks the first set of consecutive increases in more than a year.

Separately, the S&P/Case-Shiller housing price index showed a 10.8% annual increase for April.  The index is based on a three-month moving average, and it is released nearly two months later.  Therefore, this report issued on the last Tuesday of June, reflects actual sales prices for February, March, and April.

Taken together, these reports bode well for the housing industry.  Housing is still a long way from the frothy levels of the mid-2000s, but it is showing signs of a sustainable recovery.  Homebuilders, and the rest of the Consumer Discretionary sector, have been lagging the market for months, and they now have the potential to outperform in the second half of the year.

Investor Heat Map: 6/25/13


Energy stands head and shoulders above the crowd, and it added to its gains and momentum again this week.  Much of its current success is attributable to the war premium on the price of oil, which is now trading above $106 a barrel.  This catalyst is unlikely to go away anytime soon.  Utilities staged a dramatic recovery and leapt from eighth place to second.  It was in first place eight weeks ago before slowly sinking as low as ninth.  Its recent breakout is now being tested, and it would be prudent to see Utilities pass the test before establishing new positions.  Technology slipped a spot to third.  Health Care jumped from seventh to fourth, returning to the upper half of the rankings for the first time in more than three months.  Materials and Real Estate are tied and occupy the middle ground.  Both posted improved momentum scores, but Materials slid two places and Real Estate climbed a couple spots to meet in the middle.  Industrials slid six places, as sector heavy-weight General Electric (GE) slumped again this past week.  Telecom managed to pull itself out of the basement, a position it occupied the past two weeks.  Consumer Discretionary has reclaimed last place honors, a distinction it has held a dozen of the past fourteen weeks.


Even though there is tight compression in the momentum scores of the top five style categories, there was no change in their relative rankings this week.  Mid Cap Value and Large Cap Value sit on top, followed by Mid Cap Blend, Large Cap Blend, and Mid Cap Growth.  Visually, the upper left hand region of the style box matrix is where strength resides.  The anomaly being Mega Cap, which finds itself just one stop off the bottom.  Apparently, it is possible for a company to be “too big” in this market.  In another sign of cohesiveness, the top seven categories plus Small Cap Value all added two momentum points this past week.  Ranking changes in the lower half were the result of categories failing to match that two-point pace.  Mega Cap was the only category losing momentum, causing it to drop to tenth place.


Japan completed its climb up the rankings, jumping to the top today from fifth a week ago and last place just a month ago.  The dramatic turnaround for Japan comes amid economic reports signaling expansion and renewed stimulus efforts by the Abe administration.  Canada posted strong performance, thanks to a prosperous Energy sector, and made Japan earn the top spot.  The U.S. climbed from sixth to create a tie with Emerging Markets for third place.  World Equity improved two places while Latin America did the opposite.  China tumbled from first all the way to eighth as stocks there have come under selling pressure the past few days.  The bottom three are unchanged, with the U.K. and the E.U. barely ahead of Pacific ex-Japan.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“We’re going to want to see the June and July numbers to make sure the trend is real, that we’ve exited a soft-patch.”

Robert Dietz, economist with National Association of Home Builders, 6/24/14


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