UK homebuilders
Comment of the Day

June 28 2016

Commentary by Eoin Treacy

UK homebuilders

Eoin Treacy's view

The homebuilders sector has reacted more violently to the UK’s referendum result than just about any other sector. The conclusion many have jumped to is that with the decline of the Pound and, seeming inevitability of recession, demand for UK housing will plummet and may in fact act as a catalyst to high priced London property finally rolling over. 

If that scenario is in fact realisable then traders have priced in a good deal of the bad news already. Deep short-term oversold conditions are evident and it is probably an opportune time to highlight that if negotiations to join the EU are lengthy, negotiations to leave are unlikely to be concluded in a short period of time regardless of how much the EU might like to put the event behind it. 

At dinner over the weekend, a Malaysia friend said her friends and family back home were buying up Pounds with both hands because they have long experience of a productive relationship with the UK and many have sent their children to be educated there. The swift decline of the Pound has resulted in prices for property falling abruptly from the perspective of foreign investors. That’s obviously bad news for current holders but represents a source of interest for potential new buyers. 
The key question will be where the Pound eventually finds support. It has steadied somewhat today but a potentially lengthy and moreover volatile, period of support building will be required before we can confidently conclude the depreciation is over. 



Bovis Homes, Taylor Wimpey and Persimmon are representative of the massive reactions against the prevailing trends evident on almost all UK homebuilder stocks. This is a textbook Type-2 top formation completion characteristic. Very often Type-2 tops are followed by first steps below the top or, as we say at The Chart Seminar, periods of right hand extension. 

The reason is because people are surprised by the severity of the setback and begin to question whether value has now returned. This is at least partially counterbalanced by the trauma stale bulls have experienced, who are now unwilling to buy more but are instead looking for an opportunity to sell. 

Following such a large move there is potential for a rebound which could get back up towards the lower side of the overhead ranges before the next significant pullback unfolds.

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