HOME CONSTRUCTION ETF IS YEAR'S BIGGEST WINNER AND HAS ACHIEVED A BULLISH BREAKOUT -- LEADERS INCLUDE DHI, LENNAR, MERITAGE HOMES, AND TOLL BROTHERS -- RYLAND MAY BE NEXT -- S&P HOMEBUILDERS SPDR ALSO LOOKS STRONG -- USG CORP IS BUILDING MATERIAL LEADER
HOMEBUILDING ETF ACHIEVES BULLISH BREAKOUT ... The latest Euro rescue package announced on Friday caused a sharp upturn in risk assets at week's end. Global stocks and commodities soared, while bonds and the dollar fell. The Euro and most other foreign currencies surged. Arthur Hill covered Friday's events yesterday, so I won't repeat them here. What I would like to repeat is an admonition to keep a close eye on homebuilding stocks which are staging a pretty impressive recovery of their own. We've written several bullish articles on the housing group extending back to last December. They bear repeating. For one thing, the Dow Jones U.S. Home Contruction iShares (ITB) is the top performing sector ETF for the last week, the last quarter, and the first six months of 2012. For another, the ITB experienced a very impressive upside breakout this week. The weekly bars in Chart 1 show the ITB breaking decisively through its spring 2010 high to reach the highest level in four years. The solid area below the chart is a ratio of the ITB divided by the S&P 500 which turned up last October and is still rising. The rising ratio reflects superior homebuilder performance this year. The S&P Homebuilders SPDR (XHB) has also done well, but not as well as the ITB. The ITB has risen 41% this year versus 25% for the XHB (while the S&P has gained 8%). Homebuilding stocks account for 67% of the ITB versus only 29% for the XHB. That makes the ITB more representative of homebuilding stocks' improving performance.
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Chart 1
HOMEBUILDING LEADERS ... The following charts show a number of leading homebuilding stocks that have also broken out (or are close to doing so) that have accounted for most of the recent strength in the ITB. Chart 2 shows DR Horton (DHI) breaking through its early 2010 high to achieve a bullish breakout. Its RS line (below chart) has been rising all year. DHI is the biggest holding in the ITB (10%). The second biggest holding is Lennar (9%). Chart 3 shows Lennar (LEN) also achieving a bullish breakout. The third biggest holding (9%) is Toll Brothers (TOL) which is shown in Chart 4. It too has achieved a bullish breakout. [Charts 4 through 6 use a logarithmic scale which shows "percentage" instead of "absolute" price change. The recent homebuilder gains look even more impressive on a log scale]. Chart 5 shows Meritage Homes (MTH) also achieving a bullish breakout. Chart 6 shows that Ryland (RYL) may be the next one to do so.
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
BROADER HOUSING INDEX ALSO TURNS UP... The S&P Homebuilders SPDR (XHB) is also acting quite well. Chart 7 shows the XHB trading just shy of a new 52-week high. It did, however, reach a four-year high earlier this year. Its relative strength line (solid matter) has also been rising all year. The XHB gives a smaller weight to homebuilders (29%) than the ITB, and a bigger weight to other housing-related groups like building products (28%) and home furnishings (26%). Even so, the chart pattern for the XHB confirms the much stronger picture for the housing sector. USG Corp (USG) deals in building materials and is one the top holdings in the XHB. The weekly bars in Chart 8 show the stock nearing a test of its 2012 high. Its relative strength line (below chart) has been rising all year as well. The big green volume bars since the start of year also confirm impressive upside volume. The strong chart pattern in USG appears to reflect growing demand for building materials.
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Chart 7
