Thursday, June 23, 2022
There are always exceptions to the rules and trends.
And while I’m seeing “bottoming” signs throughout the market, one sector in particular remains doomed for more downturns: homebuilding.
Why? It’s simple economics...
When mortgage rates suddenly soar to a 14-year high — and affordability was already low — demand dries up. Especially when we’re likely in or about to enter a recession.
Yes, I say this fully aware that homebuilder stocks are already down about 40% from the recent peak. But there’s more selling to come. Possibly another 25% downdraft.
I say that based on historical drawdowns in the sector and the latest fundamentals.
More specifically, after suffering a 40% pullback, the sector sold off another 20.5% and 25.9%, respectively, during the two homebuilding stock declines during the 1900’s.
If we look at all seven downdrafts of 40% or more, we’re in store for at least another 14% downdraft, based on the averages.
As for fundamentals, look no further than the news this morning that they’re deteriorating…
KB Home (KBH) reported better than expected earnings. However, management warned that the “housing market is moderating.”
Newsflash: We’re only a few months into the relatively “high as hell” mortgage rates impacting buying behavior. So I fully expect this tone of “moderating” to turn into a full blown dropoff in demand, especially since we’re likely in a recession, as we speak.
The end result? Look for home builders like KB to quickly lower and still miss guidance as the year progresses and the Fed keeps jacking up interest rates.
I talked about all this and more during an appearance on Fox Business’ Varney & Co.
Click on the image below to hear it all.
Then, check out our Trend Trader Pro “Trade of the Week” for a unique way to possibly rack up triple-digit gains as homebuilding stocks keep slumping.
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Ahead of the tape,