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With investors trying to guess on when the Federal Reserve will raise interest rates, housing stocks have risen since the end of January and most of them are in overbought territory on their daily charts. Over the past few days, many members of the Federal Open Market Committee have been on the publicity trail giving their thoughts on interest rates and the economy. Now the members head in to a quiet period ahead of next week’s rate decision on Wednesday.
The housing sector is one of the most interest-rate-sensitive sectors and rising interest rates would be tough on it. Higher interest rates make it more difficult for home buyers to afford new homes and that makes it tougher for homebuilders to sell their product.
As Fed Chairwoman Janet Yellen has softened her tone a little in recent weeks, especially after the weaker-than-expected employment report last Friday, housing stocks have jumped in the last month. Unfortunately the jump has also brought most of the stocks up to resistance levels in the form of downward-sloped trend lines.
When I ran my scans this week, two housing stocks and one housing ETF all appeared on my bearish list. The one that caught my eye the most was PulteGroup (NYSE: PHM). There wasn’t much on the daily chart other than the overbought levels on the stochastic readings, but the weekly chart painted a better picture.
What we see on the weekly chart is a trend channel that has dictated trade over the last year and a half and that PHM is just below the upper rail of the channel. We also see a potential second layer of resistance just overhead via the 104-week moving average. The moving average did halt a rally in April as well as last November.
The weekly stochastic readings did recently move out of overbought territory, but they have turned back up and are close to being in overbought territory again.
While interest rates will undoubtedly play an important role in how Pulte performs over the next few years, I think it is important to remember why the FOMC may hold off on raising rates at next week’s meeting.
The reason the Fed is toning down the comments about raising rates is because it sees the economy potentially weakening. The only thing that might be important than interest rates for homebuilders is a growing economy. From its high in 2005 to its low in 2011, Pulte lost 93% of its value.
I would look to short Pulte above the $18.50 mark with an initial short-term target of $16.50 and a longer-term target of $14.50. The $16.50 level marked the low in April while the $14.5o level acted as support in January and in late 2013. Should the stock close a week above the $19.20 level, I would look to close out the bearish trade.
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