Tuesday, May 14, 2013

Home Builders & Lumber

Home building stocks and in fact, the entire home building complex, have been on a tear since October 4th, 2011 when stocks staged a key reversal from which, by and large, they never looked back.  But the price of lumber has not been keeping up with the stocks:

(Click on chart for larger image)
The commodity has been on a steady downtrend since the second week of March.  Some may point to the global slowdown in all commodities for Lumber's slump but industrial commodities commenced their downturn some months earlier.  Also notice the price relative panels below comparing lumber's price to the iShares Dow Jones US Home Construction ETF (ITB) and the SPDR S&P Homebuilders Index (XHB).
As we focus on each of the home builders ETFs which are basically comprised of home builders, home improvement retail, furnishings and building products companies in different proportions we can see a significant divergence between the main commodity used by this part of the economy and both ETFs:
(click on chart for larger image)
(click on chart for larger image)
Notice a few things from the two charts above:
1.  The top panel is the price of lumber correlated with the price of the ETF.  If you observe closely a downturn of the correlation either precedes (most of the time) or coincides with a downturn of the ETF (more on ITB than XHB).
2.  I've pointed to the extreme divergence on the right side of each chart.
Aside from the fact that the homebuilders are setting up for a meaningful correction (like the rest of the market?), the price action in the stocks in the face of such a glaring divergence is symptomatic of the froth in the equity markets in general.  And all thanks to Uncle Ben and his playmates at the Fed!