Correction Ahead for Homebuilder Stocks

Homebuilders, of course, love the quasi-private, quasi-governrnment agencies, Fannie Mae and Freddie Mac. When they make credit available to homebuyers, homebuilders get the green light to break ground on new construction. And naturally, revenue and profits follow.

Homebuilder stocks staged a recovery from their 2009 bottom fairly late in the game. Making little progress through 2009 and 2010, they got oversold in late 2011 and made bullish breaks of prior highs in early 2012. From there, the rally was on.

Here’s a chart showing the performance of homebuilder stocks (XHB).

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XHB was up 53% in 2012 and added another 25% gain in 2013.

But now, homebuilder stocks look to be overextended. Since late 2012, the Relative Strength Index (RSI) has been trending downward, while the price of XHB has continued to trend higher.

That mismatch is called Negative Divergence. And it’s a sign that the strength in homebuilder stocks may be waning.

I’m keeping a close eye on this trend. For now, I recommend steering clear of homebuilder stocks as they’re due for a correction.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.