Momentum Trade Gets New Hero as Every U.S. Homebuilder Gains

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Shares of U.S. homebuilders rallied further Tuesday, as real estate comes to the rescue of a U.S. bull market whose foundations have been weakening.

Up almost 19 percent in 2015, the Standard and Poor’s Supercomposite Homebuilding Index has advanced to a two-year high against the broader index. The homebuilder group climbed in seven of the last eight days through Tuesday, beating the S&P 500 by 9.4 percentage points. Every company in the 13-member gauge, from D.R. Horton Inc. to PulteGroup Inc., has advanced.

Relative strength is coalescing in the group at a time when bull market champions such as biotechnology and media stocks have stumbled. Homebuilders capped on Tuesday their biggest two-day rally since January after a report showed that residential starts climbed to an almost eight-year high.

The group has been undergoing a “bearish-to-bullish reversal” as it approached a “a level that has a lot of meaning,” said Carter Worth, a New York-based technical analyst at Cornerstone Macro LLC. On a relative basis, the group in the past two days surpassed previous highs set in April 2015 and February 2014.

Investors are warming to the stocks again even as the broader market has been “a little squishy” in recent weeks, Worth said in a phone interview. Amid signs the U.S. housing market is on the mend, homebuilders and related stocks “look poised to move higher still in the days and weeks ahead.”

New-home construction in the U.S. climbed 0.2 percent in July to a 1.21 million annualized rate, the highest level in almost eight years, according to figures released Tuesday by the Commerce Department.

Meanwhile, the National Association of Home Builders/Wells Fargo builder sentiment gauge rose to 61, the group said Monday, the highest since November 2005, from 60 in the prior two months. Readings greater than 50 mean more respondents report good market conditions.

Improving Market

That report, as well as indicators such as home prices and sales of new and existing residences, show progress in the U.S. housing market as it starts to “move in the right direction, albeit somewhat slowly,” said David Mazza, head of ETF research in Boston at State Street Corp. “If companies are feeling better about the state of the market, stock prices tend to follow.”

Inflows into a housing-related exchange-traded fund -- the SPDR S&P Homebuilders ETF -- also have become “a bit more positive” this month, Mazza said in a phone interview. It suggests investors are warming to the stocks again after outflows increased in April and May, he said.

The rally in the homebuilders group indicates an allocation shift could be under way, as the group is “starting to creep toward the top of sector performance in a generally frustrating U.S. equity market,” Michael Shaoul, chief executive officer at New York-based Marketfield Asset Management, wrote in a note. “The balance of evidence suggests that the key corner has been turned in the U.S. new-home market.”

Home Sales

Sales of new homes have averaged about 512,000 year-to-date, almost 21 percent higher than the comparable January-June period of 2014, according to figures from the Commerce Department. July numbers are scheduled for release Aug. 25.

Gains in employment are bolstering home purchases. Payrolls grew in July by 215,000 workers following a 231,000 gain in the prior month, and the jobless rate held at a seven-year low of 5.3 percent.

Risks remain, such as whether volatility in the rest of the stock market spills over into builders, Mazza said.

Worth says he’s “cautious” about the broader market though the homebuilder stocks “don’t necessarily move in line” with it. Between April 2011 and June 2012, for instance, the homebuilders rallied while the S&P 500 was basically unchanged.

Gains this year have been widespread. Eleven of the 13 members of the S&P homebuilding index have outpaced the S&P 500 year-to-date, led by TopBuild Corp., Standard Pacific Corp. and Meritage Homes Corp.

As investor sentiment improves, these stocks could rally further amid signs the U.S. economic backdrop is on sound footing, Mazza said.

“We’re starting to see the recovery move from Wall Street to Main Street,” he said.

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