Home Builder Stocks’ Selloff May Be Following The Bear Market In Lumber

Market timer Tom McClellan says downtrend in lumber prices warns of weakness in housing market

by Tomi Gilgore. Read more in Market Watch

If investors in stocks of home builders are wondering why they are losing money Thursday despite such upbeat new home sales data, traders of lumber futures may be smugly thinking: “Told you so.”

New home sales for August jumped more than expected to the highest level since February 2008. But the SPDR S&P Home builders exchange-traded fund XHB, +0.17%  fell 0.5% in afternoon trade Thursday, and was down as much as 2.1% earlier in the session. The home builder-sector tracker (XHB) has lost 2.8% this week, and slumped 8.8% since it hit an 8 1/2-year high on Aug. 19.

FactSet Pullback in home builder stocks may be just the beginning

Some chart watchers might say, that’s easy.

Tom McClellan, publisher of the investment newsletter McClellan Market Report, said his research suggests lumber prices seem to foretell, about 12 months in advance, changes in the rate of new home sales. “That is important because lumber has been falling rapidly this year, which suggests a corresponding drop in new home sales in store over the next 12 months,” McClellan wrote in a recent report to clients.

Based on that assessment, home builder stocks appear to be well overdue for a bigger selloff.

Continuous lumber futures LBX5, -0.09%  declined 0.1% Thursday to the lowest level in nearly four years, as they have tumbled 34% so far this year.

Selloff in lumber prices may suggest home builder stocks are overdue for bigger decline

What’s worse, McClellan said this week that recent data in the Commitment of Traders Report, published by the Commodity Futures Trading Commission, regarding the recent activity of commercial traders—the so-called “smart money”–suggests log prices are likely to see a further big drop over the next couple of months.

“And that is another sign of economic troubles about to befall not only the lumber market but also the rest of the economy,” McClellan said.