ETF Update: Homebuilders on the Rise?

One benefit from using advanced trading techniques — both systems and screening methods — is finding ideas you would otherwise miss. Expect to be surprised sometimes as we were this week with the rise of the homebuilders in our rankings. This is a significant improvement for a group that spent many weeks at the bottom of our list. (For new readers, there is a further explanation of our approach at the end of the article.)

Dow Jones U.S. Home Construction Index Fund (ITB)

Our representative for the homebuilders is the iShares fund, Dow Jones U.S. Home Construction Index Fund (ITB). It includes the large U.S. construction companies, with the top ten making up more than half of the fund. The reported P/E ratio of 17 does not seem especially cheap. In a cyclical name like ITB, however, the P/E ratio is less important than where we are in the cycle. Companies will always be cheap on a P/E basis at the top of the cycle and apparently expensive at the bottom.

Positive Signs. Jim Cramer recently made a few mildly positive comments. He noted that the stocks held the prior lows during the last sell off. Cramer (like us) believes that the recently-passed housing bill will be important in stabilizing home prices. He sees that happening in six months, but notes that the time to buy might come earlier. In this video he discusses using Centex (CTX) as a guide to the entire group.

After the Cramer comments, Centex missed earnings. The company was pretty cautious in its guidance. The Wall Street Journal also pointed out that the housing bill restricted assistance for new borrowers lacking traditional down payments.

Despite this mixed news, the homebuilders had a positive week. Many see that sort of response as a bullish sign.

Tom Lydon also considers the potential housing effects as part of his regular ETF coverage.

Time to Act? The point of using a system is to help you find and make trades you would not on your own. If you are going to substitute your own judgment for the system, you need to have a strong and specific reason. We do not see the immediate catalyst for the group and neither does anyone else. Our time frame for this method is one month, not the longer period nearly everyone expects before housing prices bottom. Cramer’s “six months” may be the most bullish!

There are very few recent recommendations or comments on this sector, despite some recent strength. That alone makes it interesting.

Weekly TCA-ETF Rankings

There were several trades this week, including very brief says in FXI and IHI. Most sectors remain in the “penalty box”, although the overall picture is much stronger. The overall market indexes and the inverse index ETF’s are close together in the middle of the rankings.

Using the model as our guide, we continued our recent “neutral” forecast in the Ticker Sense blogger sentiment poll.

Listed below are the week’s rankings and our trades:

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Originally published at a Dash of Insight and reproduced here with the author’s permission.