HOMEBUILDERS CONTINUE TO SHOW STRENGTH -- PHM AND MASCO MAY BE NEAR UPSIDE BREAKOUTS -- REGIONAL BANK SPDR IS TOP BANKING ETF -- THAT'S DUE MAINLY TO THE EXCLUSION OF BIG TROUBLED BANKS
HOMEBUILDERS CONTINUE TO STRENGTHEN... Last Thursday's message was about a strengthening housing sector. It showed two housing-related ETFs climbing over their 200-day moving averages for the first time in several months. Those upside breakouts are holding. In fact, homebuilders are one of today's strongest groups. Chart 1 shows the SPDR Homebuilders ETF (XHB) consolidating above its 200-day line. Its relative strength line (below chart) has been rising throughout the fourth quarter. Last week's message also showed Lennar and DR Horton to be the two strongest homebuilders. A number of others that have cleared their 200-day lines include Ryland (RYL) and Toll Brothers (TOL). The next one to accomplish that task may be PulteGroup (PHM). Chart 2 shows the stock gaining more than 4% today and "coiling" right at its 200-day line. The shape of the pattern suggests that an upside breakout in PHM is likely. I explained last week that the XHB includes several non-homebuilders that are tied to housing. The second biggest XHB weighting belongs to Masco which deals in home improvement and building products. Chart 3 shows Masco (MAS) nearing a test of its October high and its 200-day line.
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Chart 1
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Chart 2
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Chart 3
REGIONAL BANKS SPDR CLEARS 200-DAY LINE... I suggested last week that there was a link between rising housing stocks and banks. That shouldn't be surprising since banks are heavily involved in mortgage lending. Banks are leading financial stocks higher today. Not all bank ETFs are equal however. Chart 4 shows the SPDR KBW Bank Index (KBE) showing improvement, but still well below its 200-day average. By contrast, Chart 5 shows the SPDR KBW Regional Banking ETF (KRE) having cleared its 200-day line and trading at the highest level since July. Notice the two rising relative strength ratios below Chart 5. The green line is the KRE:SPX ratio, while the brown line is the XHB:SPX ratio. They two lines are almost identical, which seems to support the view that the upturns in banks and homebuilders are linked.
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Chart 4
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Chart 5
REGIONAL BANK LEADERS... One of the reasons for the stronger regional bank (KRE) performance has to do with its relative weighting. Five of the heaviest weighted KRE stocks have cleared their 200-day averages. Three of those regional bank leaders are shown below. By contrast, only two of the five biggest stocks in the KBE have done that (CSE is the top-weighted stock in both ETFs). In my view, however, the biggest reason for the stronger KRE performance is simply the absence of large U.S. banks that have been holding the bank sector back.
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Chart 6
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Chart 7
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Chart 8
BIG BANK LOSERS... We need look no further than the four big stocks shown below that continue to weigh down the KBE.. They include JPMorgan (-21%), Bank of New York Mellon (-28%), Citigroup (-35%), and Bank of America (-53%). All four are included in the KBE, but are excluded from the KRE. That's reason enough the favor the regional bank ETF (KRE) over the KBE. It's also a good reason to favor the KRE over Bank Regional Holders (RKH). Chart 10 shows the RKH still trading well below its 200-day line. The RKH includes three of the big bank losers shown in Chart 9. That explains its relatively weak performance. If you're looking to invest in a reviving banking sector, the best bet is the regional bank SPDR (KRE) shown in Chart 5. I wouldn't be surprised if gains in regional banks and homebuilders are among the biggest surprises of 2012.
Chart 9
