Surf Report 8.1: Bail Out on XHB
Homebuilders and Related Housing Sector Companies in the XHB, Part 1
Bailing – Jumping off your board into the water in order to avoid a bad encounter
As the picture and definition suggest, this is a wave that you want to get off of or risk potential injury or worse. Maybe it was a great ride but for some reason or other it has become imbalanced or unsteady. Its time to bail. Similar to ocean surfing, Elliott Wave surfers also seek to bail out of waves before or as they top to lock in profits or risk great damage to their portfolios. This is important to remember as it will be a common theme in this new series of Surf Reports which will cover US Homebuilders. I thought this would be an interesting series as many seem interested in the housing sector. Housing has become historically unaffordable with rising mortgage rates and prices not backing off that much as sellers refuse to leave their low rate mortgages and buyers are few and far between due to affordability issues…
Can we use Elliott’s waves to determine where housing prices are going? We can and did so in Part 6 of the Upcoming 21st Stagflationary Depression Series. However housing price data is only released monthly so the analysis is a bit rough to check counts at smaller degrees. Let’s take some time to add more clarity on the housing sector by looking at homebuilders. Why homebuilders? Because its their business (and certainly the business of those who own and buy shares in these companies) to understand trends in the housing market. Historically homebuilders lead housing prices by 8-12 months. A fantastic analysis of this phenomena is presented in a wonderful book The Socionomic Theory Of Finance by Robert Prechter (which I highly recommend you take time to read and study).
Quoted directly from Prechter’s text, “Figure 21 shows what happened to homebuilding stocks: a staggering 92% decline in just three years. Real estate prices followed, with an eight-month lag”. Prechter used Elliott Waves to predict a housing price decline using the S&P500 Homebuilders Index. I say we do the same and dig into some homebuilders ourselves to see if they can give us some greater clarity on where housing prices may be headed this time around. Remember history does not repeat but sure does rhyme. We will use the SPDR S&P Homebuilders ETF (XHB) as a proxy and look at individual components within the fund. This ETF has 35 total holdings and seeks to provide exposure to the homebuilders segment of the S&P TMI, comprising the Homebuilding sub-industry, and includes exposure to the Building products, home furnishings, home improvement retail, homefurnishing retail, and household appliances sub-industries. Maybe this series will give us a clue where housing may be headed with greater fidelity, with a nice lead time no less! Lets begin.
SPDR S&P Homebuilders ETF, XHB
As we always do in new Surf Report series, we’ll begin by looking at the ETF itself. The fund was incepted in January 2006, so we don’t know what the larger degree counts are that may influence the larger trend. However we do know as we can clearly see from the chart that XHB had a clear 5 intermediate waves up from the 2009 lows. Price recovered aggressively from the local lows of June 2022 but one should be cautioned about the negative divergence that’s building in the MACD and an overlapping wave structure that has telltale signs of a B waves. This increases the probability that a larger degree correction lay ahead. Price could first stretch a little higher as shown in the zoomed 144min chart. Wow! Not a good look so far. But are the holdings in XHB like this or will we see some outliers?
Carrier Global Corp, CARR
Carrier Global Corporation is an American multinational heating, ventilation, and air conditioning (HVAC), refrigeration, and fire and security equipment corporation based in Palm Beach Gardens, Florida. The company was formerly part of United Technologies and began trading under its own ticker in 2020 so we have limited history when looking at the wave structure. However there is enough to determine an Intermediate top is being formed which just a few more squiggles left to fill out in Minor Wave 5 of (1).
Lennox International Inc, LII
Lennox International Inc. is another provider of HVAC systems and climate control products based in my hometown of Dallas, TX. Its been pretty hot here in Texas this summer so God bless Texas and God bless HVAC systems! Looking at the chart, LII is also showing signs of a B wave with overlapping structure and negative divergence building on longer timeframes. As discussed in the Surf Report 7.3, B waves can and do extend higher that the previous high at times. This is what I think we’re seeing here. As shown in the 144min chart, just one more wave up is left to fill out a complete 5 wave structure in C of an Intermediate (B). The rest of Primary 4 awaits. Bail out before that wave (C) turns your profits into fish food on the reef! We’ll have to wait and see if the bottom long term channel will hold for a flat near the 23.6% Fib support.
Owens Corning, OC
Owens Corning is an American company headquartered in Toledo, Ohio that develops and produces insulation, roofing, and fiberglass composites and related materials and products. It is the world's largest manufacturer of fiberglass composites. The company filed for Chapter 11 bankruptcy in 2000 but relisted shares in 2006. Price found a bottom in 2009 after being pummeled during the Great Financial Crisis (GFC) to begin the Intermediate count that I believe is finishing up in the near term. A brutal Primary wave 2 awaits that could be quite crushing. A little higher extension may be expected first though. The 144min chart shows a closer view where Primary 1 may find some resistance and put in a very meaningful top of this final wave.
Builders FirstSource, BLDR
Builders FirstSource, Inc. is a manufacturer and supplier of building materials. BLDR is also headquartered in Dallas, Texas, and is the largest supplier of building products, prefabricated components and value-added services in the US. Once again we see a larger Intermediate degree 5 wave structure that is nearing completion. We have no idea how deep or long Primary 2 will last. Remember Wave 2s can retrace the entire move of wave 1. I certainly hope and don’t believe that will occur but a larger retrace should be expected that could take price down significantly.
Trane Technologies PLC, TT
Trane Technologies plc is a manufacturing company focused on HVAC and refrigeration systems. Its our 3rd HVAC company in this report! TT has a long history through various mergers and spin-offs. Price made and all time low at the depths of the GFC to begin a new Primary structure which like Owens Corning is finishing up now. But like OC it also has one more high to complete Intermediate (5) of Primary 1 which could test the top of the channel but doesn’t have to. Investors will also want to bail out on this one to before Primary 2 begins.
PulteGroup Inc, PHM
PulteGroup is an American residential home-construction company based in Atlanta, Georgia, and is the third-largest home-construction company in the United States based on the number of homes closed. This chart looks a bit different. I see a very long term bullish trend in place with price in the heart of a Primary 3 wave based on the Fibs and wave structure. However a three wave diagonal appears to be completing for a Minor degree 1 of (3). But one must be careful of a looming wave 2 of (3) which could potentially retrace all gains made since the March 2020 lows although I think its reasonable to believe it may find support before that level is seen. Here is a closer look at the topping structure with a 144 min chart.
Carlisle Companies Inc, CSL
Carlisle Companies Incorporated is an American diversified company that designs, manufactures, and markets a wide range of products to customers worldwide including commercial roofing, energy, agriculture, lawn and garden, mining and construction equipment, aerospace and electronics, dining and food delivery, and healthcare. In the chart we can clearly see a very long term price channel with a high probability that Primary wave 3 has topped. It wouldn’t surprise me at all if Primary 4 retested the bottom channel. But first one needs to be sure that wave B of (A) has finished. Looking a the 144 min chart, the 78.6% Fib retrace so far has held as overhead resistance but still needs a full 5 waves down to be certain B has completed
Williams Sonoma, WSM
Williams-Sonoma, Inc. is an American consumer retail company that sells kitchenware and home furnishings. Its brands include Williams Sonoma, Williams Sonoma Home, Pottery Barn, Pottery Barn Kids, PBteen, West Elm, Mark and Graham, and Rejuvenation. Her again we see a Primary wave 3 that has likely completed with Primary 4 well underway. Looking at the 144 min chart price could still make a higher B with resistance between the 61.8% and 78.6% Fib retracement levels. B waves are for bailing out if one missed the top.
Home Depot, HD
We last looked at gest home improvement retailer in the United States in Part 6 of the Upcoming 21st Century Stagflationary Depression in which was published nearly a year ago. Back then Elliott’s waves declared that the major cycle top was in place. That view as you see below has not changed and Intermediate (A) appears to be underway. If we look closer at the 144 min chart, it seems price is making an attempt at a higher B with resistance between the 61.8% and 78.6% Fib retracement levels.
Toll Brothers, TOL
Toll Brothers designs, builds, markets, sells, and arranges financing for residential and commercial properties in the United States. In 2020, the company was the fifth largest home builder in the United States, based on homebuilding revenue and calls themselves “America’s Luxury Homebuilder” Although price may extend just a bit higher, TOL is also approaching a very meaningful Cycle top. A closer look at the 4-hour chart shows a more detailed view of the Primary 5 count and where potential Intermediate (5) may extend which anyone surfing this may want to consider bailing out.
Summary and Observations
Unfortunately, the analysis provided here does not bode well for the Homebuilders in the coming years. Everything that we looked at in this report has topped or will be topping in the near future. There are a few such as CARR, TT, and TOL with one more high (OMH) left. PHM looks the best but also can face a serious pullback if its wave 2 is deep.
One can only speculate on the conditions that would encourage investors to sell their holdings in homebuilder stocks. But wait here a minute, I was told by news media outlets that there was a housing shortage? Perhaps there is more shadow inventory than many believe. I thought this article was interesting. Perhaps declining macroeconomic conditions motivate many of these investors to sell. Also I would assume if the job market withers during a deflationary phase as is expected in the years ahead given the larger degree counts we reviewed in the Upcoming 21st Century Stagflationary Depression series, that may also free up some inventory as well. Remember Elliott Waves can be predictive of future catalysts, they just cant predict what these catalyst are or when they’ll occur. Elliotticians are not fortune tellers.
I hope you enjoyed this report. Next time well continue with another URA report since we still have a few more names left in Surf Report 7. After that I say we revisit the Oil and Gas sector via XLE and finish up Surf Report 6 with Part 3 since oil may have a chance to prove it has made an Intermediate bottom…
https://twitter.com/hypersonic78/status/1697638302944251951
We’ll then return to this series for Part 2 with another 10 holdings in XHB.
Until then,
Cheers and #EndTheFed!
-Hypersonic78
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