Morning Comment: Banks & Homebuilders; Headed in Different Directions?

Quiet day yesterday, but some lagging groups bounced nicely

We saw another low-volume day yesterday…which is something you don’t see very often on the second to last day of a quarter…but given the upcoming meeting between President Trump & President Xi, it was not a surprise. We did see some positive action out of two indexes that have been lagging recently (the Russell 2000 small-cap index and the SOX semiconductor index). However, given that the results of this weekend’s meetings could make a lot of what took place moot, we’ll have to wait until next week before we can determine whether those positive moves are something that will have legs.

In fact, there is little we can add about the broad market in front of this meeting this morning…because the situation could completely change by Monday morning. With this in mind, we thought we’d touch-on the technical condition of two groups…the banks and the home builders. We’ll begin with the bank stocks. After the results of the stress tests, many banks raised their dividends and increased their share repurchase programs. This has them trading higher this morning…which could be important after the action they’ve seen over the past month.

Bank ETFs testing top the end of their short-term sideways ranges.

Even though both the KBE bank ETF and the KRE regional bank ETF jumped on the first two trading days of June, they did not see any upside follow-through in the way the rest of the stock market did. Instead, they remained in VERY tight ranges. Whenever a group (or any asset) trades in a tight range for an extended period of time, the move tends to be quite large once they finally break-out. The longer it stays in a range, the larger the move tends to be (in the direction of the “break”) once it breaks-out.

In this case, a 3-4 week time frame is not overly long, but we’d also note that these two ETFs could also be seen as forming a multi-month “symmetrical triangle” pattern (not shown on the attached charts. Therefore, any further upside follow-through next week should still be enough to create some momentum over the near-term…IF (repeat, (IF) these ETFs can indeed see a break-out over the near-term. In other words, investors will still have to wait and see if today’s pop in the bank stocks can hold after this weekend’s G20 meeting before they can get too excited about the group. This is especially true since pretty much every potential lift-off in the group has turned out to be a big disappointment. Still, this is a group we’ll be watching very closely next week.

Homebuilders seeing some cracks in their technical outlook.

The other group we would highlight is another interest rate sensitive one…the home builders. We turned bullish on the housing stocks just as it was turning up in the 4th quarter (when everybody else was bearish)…and that call worked out VERY well. However, we’re starting to become concerned about its recent action. The fact that we’ve received some negative news on the group recently doesn’t help either. However, the data points we’ve seen over the past 6-8 months weren’t all that great during much of the past 6-8 months…and yet the ITB home construction ETF was still able to experience a 40% rally from late December until mid-June! However, the most recent disappointing news (which included weaker than expected “housing starts,” “existing home sales” and “new home sales”) IS being accompanied by some bearish action in the group.

More specifically, the ITB broke below its trend-line from the December lows in late May. The early June bounce took it RIGHT BACK UP to that trend-line, but it was unable to break back above it. It has rolled-over once again…and therefore, we’ll be watching to see if it can hold its May 31st lows or not. In other words, if the recent failure to regain its trend-line is followed by a prominent “lower-low,” it’s going to raise a red warning flag on the group……If this takes place, it would also raise a yellow flag on the broad market as well…as the ITB was an excellent leading indicator for the major averages last year. The ITB topped-out in July…and fell 10% BEFORE the broad market topped-out at the very beginning of October of last year.

So far, the ITB has only declined about it will have to fall further and take-out its May lows in a meaningful way…before we can get overly concerned about the recent weakness in this all-important economically sensitive group. However, this is another group that investors should be keeping a very, very close eye on as we move into the second half of the year next week and beyond.

Posted to The Maley Report on Jun 28, 2019 — 8:06 AM
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