The Housing Sector is Critical to the Market’s Seasonal Rally This Week

Dear Reader,

It accounts for almost 20% of the Gross Domestic Product of the United States…

It saw a 200% rally followed by a 94% plunge 15 years ago…

It serves as one of the better barometers for the economy…

And it’s at a familiar-looking crossroads that may be the difference between a bull and bear market in 2024.

CJ here. And, of course, I’m talking about the housing market.

From where I stand, we’re walking on thin ice or standing on concrete.

Put simply, this sector feels like it could do the unimaginable IF something big happens.

Now, I hate using conditionals like “if” when we get together to talk about a forecast like this…  But truly, this feels like a sector in the market that will go up by 30% or down by 40% in 2024.

Let’s break it down and talk about how I’m positioning for this move.

We’ve all heard the Fed’s message “higher and longer” when it comes to interest rates. There are a lot of sectors in the economy that are affected by this – but none more so than housing.

The housing market is driven by one thing: affordability. I heard a great quote this morning from a financial planner on the subject.

He was talking about the lasting effects of inflation and said that most of his clients had “too much month at the end of their money” when it came to budgeting. We’re stretched thin.

The last time we ran into a situation like this, the banks started getting cute with financing. Combining fixed mortgages with variables to offer 100% financing or more. And that’s when things went sideways. The result? A crash in the financials and housing stocks rivaled the .COM bubble’s decline.

This time around, inflation and interest rates are the Achilles heel of the situation.

Luckily for us, there’s enough data over the next week to take a read on where the “higher and longer” approach will take us.

Next Tuesday and Wednesday will offer a look at the latest inflation data with the Consumer Price Index (CPI) and Producer Price Index (PPI) data, respectively.

The Fed has told us that the inflation battle is not over and that the market needs to back off its assumption that it will lower rates in early 2024.

As recently as Monday, Neel Kashkari walked back the idea that the Fed would cut rates any time soon. Kashkari said it’s too soon to declare victory over inflation.

That said, we’ve watched the market try to “wag the dog” with interest rates for the last year. The trends – be they in the bond market or the stock market – have prevailed almost every time over the last year. This makes the Bull/Bear call a lot easier when it comes to housing, as the two critical numbers to watch are both at tipping points.

Here they are…

As of today, the yield on the Ten-Year is sitting conveniently at its own 50-day moving average. At the same time, the “long bond” as represented by the TLT shares, is also battling with its 50-day moving average.

The rally to the 50-day (in both cases) was triggered by the headlines we discussed last week. As much as I dislike headline-driven markets, we’re also dealing with the seasonality that every investor wants to see come to fruition.

This makes a powerful case for the bulls as a self-fulfilling seasonality rally is in the early development stages.

There’s your first number – the 50-day on the Ten-Year ($TNX) and the 20-year bond (TLT). Breaks below and above (respectively) will trigger the next wave of buying that will propel bonds higher and rates lower.

And that will be music to the ears of investors that have been waiting for this rally.

Now, the second number – the price of the iShares U.S. Home Construction ETF (ITB).

Returning to my opening, the homebuilders are the heartbeat of the economy and the market. The recent selloff in this sector matched the April lows but never breached long-term bull market support.

Unlike the rest of the market, the homebuilders just cleared a big technical obstacle in posting a new short-term high that took out the most recent highs in early October. Technicians identify this as breaking the trend of lower highs and lower lows. It’s a key step in breaking intermediate-term trends.

For now, the ITB shares have one job in fortifying their strength and the strength of the seasonal rally we’ve all been waiting for: Stay above $80.

A consolidation above $80 and then a follow-through move above $82.50 will confirm this leading sector’s strength and release another round of solid buying as investors return.

Even better, with sentiment still showing a lot of pessimism, this market will next find its way back to a familiar trend… climbing the “Wall of Worry.”

I’ll cover more on that later this week. For now, here’s how I am positioning myself with the iShares US Home Construction (ITB).

Using the price levels identified above, I’m giving the benefit of the doubt to the bulls by adding the January $80 calls on the ITB for $4.90 per contract.

My stop-loss will be technically based on the underlying at $80. A break (two days trading) below that hard price level will be my exit strategy while targeting $87.50 as my upside target for the ITB.

Those parameters will provide an upside target of $8.50 for the proposed call option (approximately 70%) and a downside of roughly 30% if closed using the stop-loss target.

As always, I wish you the best trading success.

Chris Johnson

Quantitative Specialist


2 Responses to “The Housing Sector is Critical to the Market’s Seasonal Rally This Week”

  1. Beverly Averitt

    When you or other specialist provide suggestions for options could you specify if is sell to close, sell to open, buy to close, buy to open as I am learning and need all the details before comfortable to follow these trades.

Leave a Comment

View this page online: