The housing sector is highly cyclical and sensitive to economic and credit conditions. Homebuilding ETFs have rallied nicely in the last year, up more than 100% since the market’s March 9 low. That doesn’t mean, however, that they’re done struggling. It might continue to be a year of fits and starts for the sector as unemployment stays high and homeowners foreclose, but you can use ETFs to diversify and mitigate risk while you wait for that firm recovery. [How to Follow the Trends.]

Asset allocators might note that over the past three years SPDR S&P Homebuilders (NYSEArca: XHB) and iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB) have displayed 56% and 64% correlation to the S&P 500, reports John Gabriel for Morningstar. [Why Homebuilders Are Surging Ahead.]

For more stories about homebuilders, visit our homebuilders category.

• SPDR S&P Homebuilders (NYSEArca: XHB): Here, only about 35% of the fund’s assets (or eight out of the 26 holdings) are invested in homebuilders. The fund also invests in other sub-industries such as building products, home furnishings, home-improvement retail, and home-furnishing retail. This is an equal-weighted market cap index.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB): Only half of the fund’s constituents are actual homebuilders, but these companies account for about 70% of the portfolio. This is a market cap-weighted index that caps non-homebuilder related companies at 40%. [Big Improvements, Big Challenges In Real Estate.]

At the very least, real estate’s comeback from the lows is impressive. Investors had priced in total financial ruin that never materialized. But now the market may have gone too far in the other direction; there are concerns that it has “overshot” and calls for a strong recovery are way too hopeful at this point. Worse yet, if a double-dip recession strikes, real estate stocks could be among the hardest-hit, says John Spence for MarketWatch. [Homebuilder ETFs Quietly Surge.]

Market watchers are in particular wondering if commercial real estate is the other shoe about to drop. Fundamentally, the sector is facing declining rents, occupancies and property values, which is in its favor. Add a weak economy, high unemployment and the possible rise of interest rates, and it’s no wonder the outlook is so bleak.

REIT funds may be able to tap into raising equity and debt and the strongest companies may be able to get salvation from investors who have deep pockets, benefiting them once the economy solidly recovers. [Real Estate ETFs: Trouble Ahead?]

It’s impossible to say who’s right here. Fundamentally, a case has been made for continued weakness; on the other hand, the real estate sector could surprise us. If you’re waiting for an opportunity, a simple strategy we use is following the 200-day moving average to determine entry and exit. [How to Follow Trends.]

For more stories about real estate, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB)

• SPDR S&P Homebuilders ETF (NYSEArca: XHB)

• Vanguard REIT ETF (NYSEArca: VNQ)

• SPDR Dow Jones REIT ETF (NYSEArca: RWR)

While it hasn’t been a smooth upward trajectory, iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB) is now touting a year-to-date return of 7.3% and SPDR S&P Homebuilders (NYSEArca: XHB) is up 5.3% this year. Earnings season has been kind to homebuilder stocks, thanks to reports from companies like Lennar Corp (NYSE: LEN), which finally notched profits after two years of losses, says John Spence for The Wall Street Journal. [Real Estate: A Sector on the Mend?]

Just because these funds have been standouts doesn’t mean that they will continue to be. After all, the U.S. housing market is still in a shambles and the recovery could continue to see its fair share of ups and downs in the forms of foreclosures, the winding down of tax breaks and the worst job market in years.  [Why the Sector Has Growing Room.]

To find those areas trending up, a simple strategy we suggest is the 200-day moving average; getting in when a fund crosses the line will ensure you’re there in time for any potential long-term uptrend, while having a stop loss will help you put a cap on your losses. Read more about trend following in The ETF Trend Following Playbook.

For more stories about homebuilders, visit our homebuilders category.

• SPDR S&P Homebuilders (NYSEArca: XHB)

• iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB)

In other housing-related news, Home Depot (NYSE: HD) announced estimate-beating earnings this morning as more homeowners sought materials for home improvement projects. Lowe’s (NYSE: LOW) announced its own earnings yesterday, also trouncing the estimates. The retailers noted that customers seemed more willing to spend on big ticket items, such as flooring and kitchen remodeling projects. iShares Dow Jones U.S. Homebuilders (NYSEArca: ITB) is down slightly in early trading; Home Depot is 4% and Lowe’s is 3.8%. [3 Signs of Improvement in Homebuilders.]

Consumer confidence fell this month to the lowest level since April 2009 as concerns about the pace of the recovery and lingering weakness in the jobs market weighed on minds around the country. In an effort to remedy the increasingly pressing unemployment situation, President Barack Obama is working to push a $15 billion jobs creation bill through Congress; it passed through the Senate last night.

Toyota’s (NYSE: TM) U.S. president has apologized for his company’s handling of safety issues. The company’s executives, safety experts and customers will testify at a congressional hearing today at the company attempts to persuade Americans that it cares about its safety. iShares MSCI Japan (NYSEArca: EWJ) is down slightly this morning; Toyota is 5.8%. The fund is down 3.9% in the last month. [For more stories about the auto industry, visit our automobiles category.]

Biden said that the $787 billion stimulus package passed by Congress has given taxpayers their money’s worth, defending it from criticism by Republicans, reports the Associated Press. He says that initiatives have saved up to 2 million jobs and that the program is only at the halfway point.

Home construction continues to improve, gaining 2.8% in January. Activity is now the highest it’s been in six months, report Martin Crutsinger and Daniel Wagner for the Associated Press. SPDR S&P Homebuilders (NYSEArca: XHB) is down slightly this morning. [3 Signs of Improvement in Homebuilding.]

Other positive numbers from the report include:

• Industrial production rose for the seventh consecutive month in January
• Manufacturing output rose 1%, thanks to an almost 5% improvement in auto production
• Indexes for both utilities and mining gained 0.7%
• Capacity utilization rose to 72.6%; it’s still below the average close to 80%, however

Deere & Co. (NYSE: DE) posted a 19% gain in profits and raised its forecast for the fiscal year. The farm equipment manufacturer credited cost cutting and restructuring with the improvement, The Wall Street Journal reports. iShares Dow Jones U.S. Industrial Sector (NYSEArca: IYJ) is up slightly this morning; Deere is 1.6%.

After weakening yesterday, the U.S. dollar is once again adding gains, reaching a two-week high against the yen. The improvements were fueled by the strong leading economic indicators report, which has markets betting that the Federal Reserve will raise interest rates ahead of schedule, reports Fabio Alves for The Wall Street Journal. PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) is up nearly 1% this morning. [For more on currencies, visit our currency page.]

The 16 nations that make up the European Union are joining forces to help Greece stave off further economic blows. Marcin Grajewski and Julien Toyer for Reuters say that although the details are still up in the air, the bloc’s leaders suggested it could include some form of loans to Greece to help it service its debt and avoid a damaging default. Europe’s ETFs are negative today. The SPDR DJ Euro Stoxx 50 (NYSEArca: FEZ) is down 0.7% so far today.

Reuters reports that state applications for unemployment benefits has dropped off last week, indicating that positive job growth may be on the horizon. The White House predicts that 95,000 jobs will be created this year.

Overall foreclosure filings dropped off about 10% between December and January. Les Christie for CNN Money reports that this contrasts with the 15%  spike in filings from one year ago, as well as the number of people who had their homes repossessed, which jumped 31%. Most industry observers also expect home prices to decline further this year before they stabilize. That will push more homeowners underwater, meaning they’ll owe more on their homes than they are worth. [For more news about homebuilders, visit our homebuilders category.]

• SPDR S&P Homebuilders (NYSEArca: XHB)

The real estate market should at least get a lift from rates on 30-year mortgages, which remain at lows not seen in years. The rate on a 30-year fixed mortgage dropped below 5% this week, reports the Associated Press.

• Many homebuilders are reporting “less bad” numbers for the fourth quarters, with write-downs and order cancellations declining and improving order rates, Matt Phillips for The Wall Street Journal reports.
• Lumber future prices are up 23.2% since the end of last year. [Homebuilders Have Room to Grow.]
• Homebuilders received a nice amount of cash from the government’s stimulus programs and tax cuts. Congress extended the net operating loss carryback from two to five years, says Stephen Rosenman for Seeking Alpha. That means homebuilders can recover taxes paid in earlier years, when they may have been more profitable.

The housing market is still seeing signs of distress: jumbo mortgage loans are defaulting and people are walking away from their homes. Stephen Roseman for Seeking Alpha reports that it should be clear that builders have made progress digging themselves out of the 2007- 2009 housing crisis.

Are the fourth-quarter numbers the result of tax breaks or a sign of true stabilization in the homebuilding sector? Only time will truly tell.

For more stories about homebuilders, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB)

• SPDR S&P Homebuilders (NYSEArca: XHB)

The number of Americans who own their home is at 67.3%, the lowest point in more than 10 years. The sector at large has shown signs that a stabilization or recovery may be in the works and with numbers at those lows, there’s room to grow, say Sarah Murphy and Jeff Bater for The Wall Street Journal.

• The home-ownership rate reached a high of 69% in 2004 as low interest rates and easy credit prompted large numbers of families to stop renting and purchase homes. The rate began to fall two years later as some homeowners struggled to make their mortgage payments and eventually lost their homes to foreclosure. Between 2007 to 2009, nearly four million homes were lost to foreclosure. And home ownership rates are now moving closer to the level that was common in the 1990s.
• One trend we’re noticing is that as Americans are buying new homes, they’re going smaller. Gone are the indistinguishable McMansions that dot sprawling new subdivisions – today, if it can be done smaller and more affordably, then homebuilders believe they will come.
• We may not be done with foreclosures. Unemployment is still at highs not seen in more than two decades, which means that more homeowners could still walk away from their homes.
• D.R. Horton Inc. (NYSE: DHI)  the second-largest U.S. homebuilder by revenue, reported its first quarterly profit since 2007 as sales rose and the company booked a tax benefit. [Plays  for a Brighter Homebuilding Future.]
• Lennar (NYSE: LEN), a Miami-based homebuilder, earned $36 million for the fourth quarter ended in November. Their shares shot up 8% to their highest levels since last October. Colin Barr for Fortune reports that the real driver of Lennar’s rebound, as the company acknowledged Thursday, was a $353 million tax gain that stems from a bit of congressional largesse in November.

For more stores about homebuilders, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB)

• SPDR S&P Homebuilders (NYSEArca: XHB)

New home sales in December had a surprise 7.6% drop last month, reports the Associated Press. The figures were the weakest since March. Analysts were surprised by the drop, given the newly expanded tax incentives. Those incentives will end this spring, which has many wondering what a recovery in the market will look like without the government’s helping hand. SPDR S&P Homebuilders (NYSEArca: XHB) is down nearly 1% this morning. [Outlook for commercial real estate.]

Analysts and rabid Apple (NASDAQ: AAPL) watchers are eagerly awaiting today’s unveiling of what’s rumored to be a keyboard-free computer that can fit in your pocket. The tablet is rumored to cost between $600 and $1,000, say Yukari Iwatani Kane and Don Clark for The Wall Street Journal. PowerShares Dynamic Technology (NYSEArca: PTF) is down nearly 1% this morning; Apple is 2.7%. [How to play tech earnings.]

Treasury Secretary Timothy Geithner testified this morning about the government’s actions in the AIG (NYSE: AIG) rescue. Geithner denied any involvement in the withholding of information about the billions that went from AIG to big banks, report Mary Williams Walsh and Sewell Chan for The New York Times. AIG received an $85 billion loan, which protected banks from losses, but left the insurance behemoth saddled with more debt that required yet another bailout. RevenueShares Financial Sector (NYSEArca: RWW) is down nearly 1% this morning; AIG is 3.2%. [For more stories about financials, visit our page.]

Other earnings coming up include Amazon (NASDAQ: AMZN), Altria Group (NYSE: MO), AT&T (NYSE: T), Jet Blue (NASDAQ: JBLU) and Microsoft (NASDAQ: MSFT).

Weakness in aerospace, construction and gas turbines offset higher metal prices, Alcoa said, and revenue also was down. The Associated Press reports that investors this earnings season will be on the hunt for clues the consumers are returning to the marketplace.

In better earnings news, KB Home (NYSE: KBH) posted a profit, thanks to tax benefits. The builder reported that revenue declined 27%, but that cancellations have slowed, reports Joan E. Solsman for The Wall Street Journal. Like many homebuilders, KB has been building smaller and more affordable homes to compete with foreclosures. SPDR S&P Homebuilders (NYSEArca: XHB) is down nearly 1% this morning. [Homebuilder ETF plays.]

Concerns about China were ignited when the country tightened its monetary policy again and raised the minimum that banks must hold in reserve. The moves were put in place to stem runaway growth, they could have a ripple effect, slowing the recovery of other countries and hurting companies that sell resources to the nation. Claymore/AlphaShares China All-Cap (NYSEArca: YAO) is down nearly 2% this morning. [Read more on China here.]

The U.S. trade deficit widened more than expected in November by 9.7%, reports Tom Barkley for The Wall Street Journal. Exports have registered seven months of gains, but a rise in oil prices has caused the deficit to creep back up.