Talking Numbers

This chart spells trouble for home builders

This chart spells trouble for home builders

They may be called home builders,but this year their stocks are portfolio wreckers.

Those who had the misfortune of buying the ETF that tracks the home builders (trading under the ticker symbol XHB) at the beginning of the year are in the red by 14 percent.

The XHB is now trading at its lowest levels this year and according to the charts, it could get a lot worse.

"Home might be where the heart is, but it's clearly not where the chart is," said Richard Ross, global technical strategist at Auerbach Grayson and a CNBC contributor.

Ross' short-term chart shows a 10 percent-wide downtrend channel in place for the XHB since the early part of this year. While that means there is volatility in the ETF, he sees its main direction to be down.

"And it goes from bad to worse when we look longer term," Ross added. "And keep in mind this is roughly an equallydistributed index of home builder and Home Depot, Lowes, Bed Bath and Beyond – all the stuff that goes into the home as well. So, really, [there is] across the board weakness and that's not what you want to see."

Ross sees the ETF as having traded relatively sideways with a bearish distributive top for nearly the last two years while the broader market has moved higher, boding ill for the XHB. "That poor relative weakness is a clear sell signal as well," he said.

With the XHB hitting critical support close to its 150-week moving average currently at $27.39, Ross warns that a break below that level means the index "could go meaningfully lower."

"We've had interest rates coming off this entire time, even as this ETF has languished," Ross said. "That's a very bearish divergence. A breakdown from a two-year distributive top could set the stage for at least a 10 – perhaps 15 – percent downside from here."

On the fundamental side, things don't look much better, according to one market-watcher. "They actually might have a little ways [down] to go," said Gina Sanchez, founder of Chantico Global, about the home builders' sector.

Sanchez's main concern centers around the fact that home prices have soften despite the fact that interest rates have hit multiyear lows, typically a favorable tailwind for home affordability.

In her view, the next stop for rates is likely higher and that could spell even more trouble for the housing sector.

Added Sanchez, "If anything, out-of-pocket expenses on a monthly basis are going to rise as we see interest rates rising."

To see the full discussion on the XHB, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.

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