Homebuilders Vulnerable in Current Market

NEW YORK (TheStreet) -- On Tuesday we learned that single-family housing starts rose 3.2% to a 516,000 annual rate.

This release is further evidence that the market for new homes is experiencing a slow recovery, but at half the pace of a healthy housing market.

The Federal Reserve's statement following Wednesday's FOMC meeting continued to describe the housing sector as "depressed," but as has been its habit, the central bank did not offer targeted help for the housing and mortgage markets.

On Monday, The National Association of Home Builders reported that its Housing Market Index, which gauges homebuilders' sentiment about the building of single-family homes in the U.S., rose one point in June to 29.

This reading is the highest since May 2007, but it's important to keep in mind that this index ranges from zero to 100 with 50 being neutral.

Although it's encouraging, the June reading is still significantly less than 50, which is an indication that the market for new homes remains weak.

The inventory of new homes for sale was reported at a record low of 146,000 units in April.

The NAHB HMI index peaked at 72 in June 2005, which is when I predicted a peak in the share prices of the homebuilder stocks.

The index has been less than 50 since May 2006, and home prices peaked in June/July of 2006. The index hit a low of 8 in January 2009.

Anecdotally, homebuilders still talk about overly tight lending conditions for both the builders and the potential buyers of new homes.

With defaults and foreclosures on existing homes still elevated, home appraisals are dragged lower by short-sales and sales of bank-owned homes.

The weekly chart shown below for the Philadelphia Stock Exchange Housing Sector Index (^HGX) shows declining momentum (12x3x3 weekly slow stochastic).

The HGX is above its five-week modified moving average at 124.15. The weekly chart profile is thus neutral.

My annual value level is 122.53 with the downtrend resistance at 132.83.

The downtrend connects the highs of July 2005, January and April 2006, and February 2007. The HGX is up 23.6% year to date and 72.7% since its Oct. 4, 2011 low. It's down 5.4% since testing the downtrend on May 2, 2012.

Homebuilding stocks have been great performers since last October and so far this year.