It was an eventful week for housing data as New Home Sales were released on Wednesday and Existing Home Sales came out yesterday.  Working in reverse order, Existing Home Sales came in ahead of forecasts on a national level, although the sales pace has remained sluggish relative to pre-pandemic or early post-pandemic levels. As shown below, on a regional basis, sales are strongest in the South by a solid margin, although that is historically normal.  Current levels are hovering around the lows from the spring of 2020 and the same applies to the West and Northeast. As for the Midwest, sales are well below those lows.

Turning over to prices, trends have a bit more variation.  Prices are highest in the West and that has been the case for over a decade now. With that said, the past few years since higher rates came into play have seen far less steady gains compared to the exponential move higher from 2020 to 2022. Likewise, the South has seen prices flatline in the past few years amid higher inventories. The Midwest and Northeast are entirely different stories. The torrid price gains of the early pandemic years have continued for those two regions with only a minor dip occurring in late 2022/early 2023.

Turning over to New Home Sales data updated on Wednesday, there was a very strong print on a national scale, surging 20% MoM versus estimates of a small decline.  The huge beat was driven by strong sales in completed homes, although sale of homes under construction also surged. Geographically, that strength was broad with all regions ticking up during the month of August.  While accounting for the smallest share of total homes, sales in the Northeast were up an impressive 72% MoM and sales in the South (the largest share of national sales and inventories) jumped by 24.7%. As shown in the second chart below, new homes for sale (inventories) have fallen meaningfully after the latest surge in sales in the South. Meanwhile, the Midwest now has some of the highest inventories for new homes since February 2009.

While the S&P 500 remains overbought in price (>1 standard deviation above its 50-DMA), its 10-day advance/decline line actually moved near oversold territory yesterday.  The 10-day A/D line measures the average number of daily advancers minus decliners in an index over the last ten trading days.  It’s a helpful measure of short-term market breadth.  When the 10-day gets overbought, it’s a sign that stocks have had a large upward thrust over the last two weeks, often preceding some downside mean reversion.  The opposite is also the case: when the 10-day gets oversold, it’s a sign that stocks within an index have struggled in the short-term, and thus upside mean reversion may be in store.

Usually, an index’s price and its 10-day track each other, but for the top-heavy S&P, there can be divergences because of how large the mega-caps have become.  Because the mega-caps have held up well over the last two weeks, it has masked underlying weakness in the majority of stocks.

From a mean reversion perspective, the oversold 10-day suggests that the average stock could be in store for a bounce, while the mega-caps causing the S&P’s price to remain overbought could take a breather.

Bespoke subscribers can monitor the 10-day A/D line and other measures of breadth in our daily Sector Snapshot.  If you’d like to check it out, start a trial to Bespoke Premium today.

As shown below, the S&P 500’s price-to-sales ratio has climbed to historically elevated levels, recently hitting 3.33. For context, the Dot-Com bubble peak in 2000 topped out at 2.27, and the post-COVID boom peaked at 3.21 before valuations pulled back. While strong corporate profitability and the AI growth theme have gotten us to these levels, this chart highlights just how extended valuations have become relative to revenues.

But there’s also a catch…

The equal-weighted version of the S&P 500 tells a different story, with its price-to-sales ratio currently sitting at 1.66, well below its 2021 peak of 2.18. This highlights the outsized role that mega-cap stocks have played in driving overall index valuations higher, as the typical stock trades at a much more modest multiple of sales compared to the market-cap-weighted index. While still elevated relative to the early 2010s, the equal-weight P/S ratio is right in the middle of its 12-year range. While valuation excesses are concentrated in the largest companies, much of the broader market is trading at far more reasonable levels.