Good Sign for Homebuilder Stocks

Yesterday's release of May New Home Sales may have been a message to buy homebuilding stocks for reasons more compelling than "the report was stronger than expected."

The estimated figure of 1.284 million sales for May appears to have rescued the tally from three consecutive poor months.  Coming off April's low total of 1.180 million, homebuilder stocks summarily plummeted; this was no surprise, as homebuilder stocks appear to be directly correlated to the New Home Sales totals.  Take a look at the monthly chart below, which illustrates the close bond between New Home Sales and the S&P Homebuilder Group index.

The circled area highlights the divergence between New Home Sales and the homebuilder stocks created by yesterday's release.  Will homebuilder stocks and the New Home Sales tally suddenly cease to move in tandem?  Don't bet your house on it.

Comments

[Mike]

Sir,

I heard a commentator mention that cancellations, which are piling up are not excluded from the new sales number and it therefore should not be considered valid. He mentioned other specifics that too seemed to somewhat invalidate the number. It seems one should be very careful making the assumption you imply.

[BDG123]

I think we should all buy homebuilders on margin. Shoot for the fences. Things are actually worse than reported. But, it wouldn't surprise me to see a relief rally of sorts by the bottom feeders. Nothing goes straight down. Although the homebuilders pretty much have so far.