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Chart In Focus

Housing Stocks Falling On Schedule

Chart In Focus
January 21, 2016

Who cares about lumber futures prices? 

You should, if you care about housing sector stocks, new home sales, interest rates, and other important data series.  Lumber seems to be a magical predictor of where lots of things are headed.  

In this week’s chart, lumber prices are shifted 1 year forward to reveal how the movements of the PHLX Housing Sector Index, HGX, tend to follow in the same footsteps.  This is a long-lasting relationship, not some newfangled and fanciful recent correlation. 

Why 1 year?  I do not know.  I only know that it has been working for a long enough period that we can dismiss its being just a random or spurious correlation.  We do not have to be able to explain everything in order to use it.  Can you explain why gravity works?

The breaking of trend lines on the plot of lumber prices tends to precede the breaking of the equivalent lines on the HGX Index by about 1 year.  We have just now seen the HGX Index break its long rising bottoms line, and almost exactly 1 year after lumber futures prices broke their long uptrend line.  Lumber futures prices were weak in 2015, so that portends equivalent weakness for housing stocks in 2016. Worth noting is that lumber projects a decline in two big waves, with a failing rally attempt before the final bottom. 

There is a light at the end of the tunnel.  Lumber prices bottomed on Sep 28, 2015, and so we can project that housing related stocks should see an equivalent bottom about 1 year later, in September 2016.  Anyone seeking to hold this relationship to an exact day is expecting more of it than history says is merited.  So think Septemberish for a bottom in housing stocks. 

We do not have to know the exact end date of the downtrend right now in order to recognize now that there is more downward movement yet to come. And that is the important point to note for the moment.  More downward movement to come, leading to an ultimate bottom for housing stocks around Septemberish.  And we have 8 months to work on a more exact date. 

Tom McClellan
Editor, The McClellan Market Report

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