The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two benchmark homebuilders exchange traded funds, have recently been building impressive gains.
For example, the equal-weight XHB is up almost 5% over the past month while the cap-weighted ITB is higher by 7.7% over that span. Recent data points boosted homebuilder equities and ITB and XHB, but some market observers believe the sector has reached an important technical juncture.
The PHLX Housing Sector Index (HGX) has finally found its way back to its 2005 highs, which could prove meaningful for ITB and XHB although neither ETF tracks that index. XHB follows the S&P Homebuilders Select Industry Index while ITB tracks the Dow Jones U.S. Select Home Construction Index.
“I will say that the HGX’s recent breakout above the July-August highs and subsequent follow through has been impressive and the momentum may carry the index further,” according to ETF Daily News.
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.”
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Federal Reserve policy could also impact ITB and XHB. In a higher rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home.
“I will also caution against dismissing the notion of price memory (in the form of resistance) stemming from the 2005 highs. Non-technicians and chartists may scoff at the possibility, but such major junctures on a chart can have a significant impact, even a dozen or more years later. Consider that the Nasdaq first encountered its 2000 highs in mid-2015. It took a full year and a half — and a bumpy one at that — before the index was able to sustain a move to new highs,” reports ETF Daily News.
Traders looking for a bearish play on homebuilders stocks can consider the Direxion Daily Homebuilders & Supplies 3x Bear Shares (NYSEArca: CLAW), which attempts to deliver triple the daily performance of the index XHB tracks.
For more information on the housing sector, visit our homebuilders category.