What Lumber's Impending Trend Test Means For Housing

This week saw yet another nail in the coffin of the 'hope-strewn housing-recovery escape-velocity growth engine of America' meme when new home sales collapsed. Homebuilder stocks, while volatile, have been trending lower recently (notably underperforming the S&P) as macro disappointments continue but, as Stone-McCarthy notes, it is the moves in lumber prices (the prime material used in home construction) that is of particular concern.


Top-down, housing macro data has been anything but reassuring...

h/t @Not_Jim_Cramer


But as Stone-McCarthy notes, it is the trend in Lumber that is most concerning...

Since lumber is the prime material used in home construction, not only is its direction a barometer of demand for new homes, but lumber prices also act as a leading indicator for homebuilder stocks. This tendency to lead can be seen on the chart directly below. Note: While some of the price spikes on the lumber chart below may be due to fact that the capacity of the homebuilding industry and many supporting industries was vastly diminished after the housing bust, the focus of today's Chart of the Day has more to do with the trend changes that have been highlighted.

From this next chart, we learn that both lumber and homebuilder stock prices are now approaching critical junctures in their respective post-crisis bull markets. Specifically, the top chart directly below shows that, since the crisis lows, lumber prices have tended to bottom between 1 and 2 standard deviations beneath the all-important 200-day smoothing line. With lumber prices now entering this support zone, and the S&P Homebuilder Index now reverting down to a critical area of linear support, market participants should be keeping a close eye on how these markets respond over the weeks ahead.

This is especially true since any breach of trend by lumber prices, after the massive divergence that has been building against homebuilder stocks for the past several months (see dashed red line) could translate into a bearish signal for homebuilders and new home sales in the months that follow any sustained trend violation.