The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB) have retreated a bit in recent days alongside the broader market, but the two marquee homebuilders exchange traded funds are still up more than 13%, on average, year-to-date.
The equal-weight XHB mixes stocks such as Tempur Sealy (NYSE: TPX), Williams-Sonoma (NYSE: WSM) and Restoration Hardware (NYSE: RH) with pure play homebuilders such as Lennar (NYSE: LEN) and Toll Brothers (NYSE: TOLL) among others. XHB is up more than 10%. With ITB being a more pure play on homebuilders equities, that ETF is really soaring with a year-to-date gain of 17.3%.
Recent data points boosted homebuilder equities and ITB and XHB, but some market observers believe the sector has reached an important technical juncture.
“A monthly index of builder sentiment jumped six points to the highest level in 12 years. The National Association of Home Builders/Wells Fargo Housing Market index hit 71 in March, a sizable jump from 58 in March of 2016. Anything above 50 is considered positive sentiment,” reports CNBC.
Some investors believe President Trump will follow through on campaign promises to reduce corporate taxes, cut back on regulations and throw billions of dollars into the U.S. economy. However, the expansionary rhetoric has caused the Federal Reserve to tighten its monetary policy, which could push up mortgage rates. Since Election Day, ITB and XHB have been among the hottest “Trump trades.”
“One of the most important is the halfway mark, or a 50% retracement. This month was the first time since the housing bubble burst that the Dow Jones U.S. Select Home Construction Index scored a weekly close above this threshold,” reports Michael Kahn for Barron’s.
ITB tracks the Dow Jones U.S. Select Home Construction Index while XHB follows the S&P Homebuilders Select Industry Index. While the breakout of that retracement is encouraging, ITB and XHB could be ready to pullback in the near-term.
“Both the Dow Jones index and the iShares ETF now sport a tired-looking configuration on their charts with momentum indicators fading. Given their strong rallies since November, it does look to be time to expect a short-term pullback,” according to Barron’s. “For the Dow Jones index, that could be a dip down to test the breakout level seen earlier this month. That would only be a 4% decline from current trading. With the evidence we have on the charts, it would be a likely place to buy the dip.”
For more information on the housing sector, visit our homebuilders category.