Why are More Building Permits & Housing Starts Boosting the S&P 500?

Dow Jones
Dow Jones

Building permits for June 2020 rose 2.1% to 1.24 million, which beat the previous figures of 1.22 million. Housing starts also rose 17% to 1.19 million, higher than the revised figure of 1.01 million for the previous month. Investors took both upbeat data well and this has led to a slightly higher open on the S&P 500 index. The S&P 500 index is up by 0.12% and currently trades at 3220.5.

The 2008 global financial crisis was precipitated by defaults in the subprime housing market. Mortgage institutions were accused of giving predatory credit to those who did not ordinarily qualify for them. The crisis created a record number of foreclosures, which dwindled new home constructions and caused an explosion in the rentals market in the US.

The coronavirus pandemic has brought a new round of challenges. With a record number of people out of work, many Americans are only able to pay rents from the government stimulus payments and their unemployment benefits. It is estimated that more than 20 million Americans are facing evictions by September when some of the stimulus payments start to run out.

A surge in building permits and new home constructions will allow for the imbalance in home ownership vs rentals to be addressed in the medium to long term, which is why investors on the S&P 500 are cheering the news.

Technical Outlook for the S&P 500

The S&P 500 continues to trade around the 3228.4 resistance. A break of this resistance is what is needed to send the S&P 500 further up the recovery ladder. However, this has to be confirmed by two successive closing penetrations above this price level by two daily candles.

If this does not happen, the recovery will remain stalled, and indeed a pullback may occur. Such a pullback would be in a position to target the 3137.0 and 3070.8 support levels, in that order, depending on the extent of the pullback.

Further support targets lie at 3028 (ceiling of support zone), and 2961.4 (floor of support zone). Only a breakdown of the support zone will usher in new targets at 2844.3 and 2707.7, in that sequence. 2739.4 could be an intervening pitstop.

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