E From Rolling Over To Rolling Higher: Home Builder Stocks Rejoin The Stock Market Rally

What a difference a month makes!

In mid-December, I demonstrated how the stocks of home builders were rolling over. I even later wrote about a precarious divergence between homebuilder stocks and the S&P 500 (SPY). Roll the tape forward and suddenly home builders are in breakout mode.

iShares US Home Construction (ITB)

The iShares US Home Construction (ITB) gained 1.7% on confirmation of its breakout the previous day.
Source: FreeStockCharts

So what gives? The iShares US Home Construction (ITB) closed at a near 14-year high with the all-time high coinciding with the index's introduction in 2006. A month ago ITB confirmed a 50DMA breakdown and was set for further losses. Well, what made last month's brief decline precarious was the relative under-performance alongside the near-record home builder sentiment reading in the Housing Market Index (HMI). ITB now trades above that level and is displaying the kind of strength I would expect after such a bullish economic reading. ITB is particularly interesting for any trader or investor looking for equities that are lagging the general market and thus offer incrementally more upside potential than the S&P 500 (SPY).

This breakout is even more intriguing after lukewarm reactions last week to earnings from KB Home (KBH) and Lennar (LEN). For LEN in particular, the market went from lukewarm to hot. The initial post-earnings response was a "gap and crap" that left the stock at its 50-day moving average (DMA). Now LEN trades at a 23-month high.

Lennar (LEN)

The reaction to earnings from Lennar (LEN) went from indecisive to decisively bullish. 
Source for charts: FreeStockCharts

Bottom line: it looks like the seasonally strong period for homebuilder stocks is back in action now! Next up: analysts who jumped aboard the bearish bandwagon by downgrading the stocks of home builders while they were under-performing will eventually decide to reverse course to avoid staying on the wrong side of a rally.

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Disclosure: long ITB call options

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Alexis Renault 6 months ago Member's comment

Who can even afford a home these days :(

Dr. Duru 6 months ago Author's comment

Builders are trying to focus on the affordable price ranges, but are still running into supply constraints in many markets.

Barry Hochhauser 6 months ago Member's comment

Well this caught me by surprise! Did not expect such a turnaround.

Dr. Duru 6 months ago Author's comment

You and me both!