A new building boom

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A new building boom by Lowry Research

The newspapers have recently been filled with stories about the new building boom. Housing prices in many areas of the country are reportedly increasing by double-digits. New TV shows featuring real estate “flipping” have been gaining in the ratings again. With all that excitement, it seems logical to assume there are big opportunities for capital gains in the Building Materials Industry Group and the Building Construction Industry Group. But, the Lowry Analysis of these two Industry Groups shows a
different story. There are, indeed, a relatively few stocks in both Groups that still appear to be in strong, positive trends. But, it is a long established principal of portfolio management to avoid a few exceptional situations within an otherwise weak industry group. And, the Lowry Analysis, based on the Law of Supply and Demand, shows that the vast majority of stocks within the Building Materials and Building Construction Industry Groups are currently reflecting a loss of investor buying enthusiasm that
typically precedes significant price declines, warning that the Building Boom may actually be fizzling.

As shown in the charts below, Lowry’s Power Ratings measure the amount of buying enthusiasm supporting a stock’s price. When the Demand for a stock begins to fade, while the stock’s price continues to advance, a condition we call a “Negative divergence” exists. The 65 year history of Lowry’s Power Ratings shows that a loss of buying interest in a stock is often a precursor of a substantial price loss, particularly when Negative Divergences develop in an old bull market, as is currently the case.  

In summary, new buying within Building Materials and Building Construction should be approached cautiously, as long as our measures of investor Demand continue to fade. As to existing holdings, in some cases stocks reflecting Negative Divergences can continue to rise in price for as long as several months. The weakening Power Rating simply shows that investor Demand is fading, making that stock vulnerable to decline. But, it takes heavy selling, not just weak buying, to drive prices sharply lower. Therefore, it is often helpful to not take any immediate action, but to draw a trendline under the recent lows of the stock’s price. When that trendline is broken to the downside, it generally indicates that selling is expanding in the face of already weak Demand, calling for a more defensive strategy. At that point, your preferred stop-loss controls should be firmly in place.

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