You Need to be Aware of What's Bubbling in Housing

I got a text from my realtor yesterday. 

Now, before I go any further, that's not a common occurrence - it's not like we link up every Tuesday and play gin rummy. 

The subject of that text was - surprise, surprise - my house. 

First thing's first, I am not currently looking to sell. But, according to him, I should be. 

Apparently, houses in my neighborhood are flying off the market, and homebuyers are chomping at the bit to secure a property. 

Well, a deeper dig starts to reveal why...


Anecdotally, I'm walking around my neighborhood and seeing "For Sale" signs posted and taken down within a matter of days. 

Ultimately, all of this tells me something that headlines - like the one from Yahoo! Finance below - are starting to reinforce... 

Despite the broader economy finding itself on an unsure footing in the wake of the banking crisis, it appears the housing market is starting to beat to a different drum. 

So, with the mortgage rates sliding - 30-year fixed rates dropped for a fourth straight week, according to Freddie Mac - we're seeing people be driven back toward buying homes and away from renting. 

Of course, with all of that said, it's not hard to find at least one group that's quite happy right now... 

That's right, our old friends the homebuilders. The below chart illustrates just that... 

As you can see, we're not quite at the point where the majority of homebuilders are optimistic, but we're on that trajectory. 

But this makes sense to me - with the inventory shortage, decreasing interest rates, and, most importantly, commodity prices being knocked down, homebuilders are once again making margins on their projects. 

Well, that's all fine and well, but I know you're not reading this and going, "Great, it's time for me to become a homebuilder." 

Thankfully, this is actionable for traders, and I've got a specific plan. 

But before we touch on that, it's important that we touch on the differences between the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB). 

In the XHB, you've got your homebuilders from the SPDR. 

Right now, it's been moving sideways for the past three months, and it's currently beneath its 50-day moving average (MA50). 

Well, the reason for that is pretty simple - and we needn't look any further than SPDR S&P Retail ETF (XRT). 

But CJ, what does retail have to do with homebuilders? 

When you look at the weighting of the XHB, there are traditional homebuilders like DR Horton Inc (DHI). But that's not the only thing in that ETF - there are also companies like Lowe's Companies Inc (LOW) and Home Depot Inc (HD). 

Sure, these companies have a contractor window and do orders where they'll drop supplies on your worksite. But let's not kid ourselves - the majority of those two companies' business comes from you and me walking into the store on a Saturday morning to buy lord knows what. 

Heck, even Williams-Sonoma Inc (WSM) - that bougie cookware company - finds itself in the XHB. 

The main takeaway is, the XHB is not the most useful indicator of the health of the homebuilders. Instead, it is a useful measurement of the companies associated with the purchase or building of a home. 

Now, the ITB is more of a nuts-and-bolts sector... 

This is more of the companies that are building and supplying the builders directly. As you can see, it recently broke its top Bollinger Band, so it's not hard to tell why I like the ITB. 

Now, among the ITB, there are a couple of different companies for which this recent mortgage news is going to resonate more. 

But the simple trade is going long on the ITB and giving it some time. As we roll into the summer and the seasonality starts to get stronger, you're going to see these companies start to stride. 

If we hear the Fed talking about leveling off interest rate hikes rather than raising them (likely with some declarations of "monitoring the data"), the homebuilders are going to take a pop. 

Historically, speaking of seasonality, April tends to be one of the strongest months for the ITB. 

That said, if we get to a more granular level on the ITB to isolate specific tickers to target, I'm starting with Lennar Corp (LEN)... 

Part of the reason I'm starting with LEN is that a few of these companies in the ITB that will be impacted by this aren't going to trade cheaply - companies like NVR, Inc. (NVR), which is trading above $5,500 per share. 

But LEN, trading around that $105 mark, represents 13% of the ITB's weight. So, when it moves, the ITB will move. 

Not surprisingly, we see LEN breaking above that top Bollinger Band. 

I'm setting a target for the $116 mark, and I'm looking four months out for this one. 

Now, this is all assuming the interest rate environment that we're seeing right now holds.

If the Fed pivots and says they'll be hiking rates higher, you're going to see people start to worry a lot about what's going on with the banks, technology stocks - the pivotal, faster-moving parts of the market. 

But not only that, you're going to see more money start to flow into homebuilders, because as people look at home prices, that inventory will become a driver. As a result, they'll fire up the machines and drill more and more holes for new projects, which could send LEN up to the $120 mark. 

It's a similar story with DHI. Trading around the $100 mark right now, I'm looking at the $115 level with a four-month timeframe. 

I've got calls on both of these right now, as well as calls on the ITB, and I suggest you play it the same way. 

But this is just the start of my list of tickers I'm looking at in this space, and there are sure to be some other trades that crop up along the way as things keep developing. 

To make sure you don't miss anything, I'd recommend you join my Night Trader service. 

In a market like this, I can't stress enough how important it is to have people you trust in your corner. 

Talk to you tomorrow morning. 


The post You Need to be Aware of What's Bubbling in Housing appeared first on Penny Hawk.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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