Homebuilders Are Rolling Over

NEW YORK (TheStreet) -- Recent housing data for the market in new single-family homes has been mildly positive, but without help from the Federal Reserve a continued rally for homebuilder stocks will be difficult.

On July 24, Goldman Sachs came out with a bullish call on housing, arguing that new construction for single-family homes would gather momentum over the next several years. Goldman upgraded its outlook for U.S. homebuilders to attractive from neutral.

While I cannot disagree with this call long-term, I believe their timing is off for the start of a significant improvement in homebuilding and that homebuilders have reached a plateau 75% below their peak in activity in 2005 and 2006.

The day after Goldman's call, we learned that sales of newly built, single-family homes declined by 8.4% to a seasonally adjusted annual rate of 350,000 units in June. The inventory of new homes remains near a record low at 144,000 units, a very slim 4.9-month supply. The builders would like to add new inventory, but it is still difficult to charm community banks into issuing enough new construction and development loans to jumpstart supply.

The Fed statement following the Federal Open Market Committee meeting on Aug. 1 stated that the U.S. economy decelerated in the first half of 2012 and had slow growth in employment and an elevated unemployment rate.

One thing I always look for in a Fed statement is what the FOMC has to say about the housing market. The FOMC described the housing sector as improving but still depressed. But again, the Fed did not offer a solution for lifting this important segment of the U.S. economy.

Before this new information came out, I wrote Homebuilder Stocks: Don't Chase the Mojo on July 19, the day after the PHLX Housing Sector Index (HGX) set its year to date high at 141.29. Yesterday, this index closed at 130.45, down 7.7% from that high.

Source: Thomson Reuters

The weekly chart for PHLX Housing Sector Index (130.45) still shows rising momentum (12x3x3 weekly slow stochastic). If HGX ends the week below its five-week modified moving average at 132.93, the weekly chart profile shifts to neutral from positive. This would indicate that the rally for the index has failed below its 38.2% Fibonacci Retracement of the entire downtrend from the July 2005 high to the March 2009 low. This retracement is the red line just above the recent peak. My annual value level is 122.53 with a quarterly pivot at 135.17 and my new monthly risky level at 152.09.

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