HOMEBUILDERS ARE HAVING A STRONG DAY -- USING RATIO ANALYSIS TO CHOOSE THE STRONGEST HOUSING ETF -- AMAZON, HOME DEPOT, AND WAL-MART LEAD VANECK RETAIL ETF HIGHER -- S&P 500 VALUE/GROWTH RATIO MAY BE JUST PAUSING IN UPTREND
U.S. HOME CONSTRUCTION ISHARES HIT NEW HIGHS... Add housing stocks to parts of the stock market that still offer value and are attracting new money. Chart 1 shows the U.S. Home Construction iShares (ITB) climbing today to the highest level in nearly a decade. That's following a jump in home sales to a ten-year high. The ITB/SPX ratio (solid area) has lagged behind the rest of the market for four years. That may be changing for the better. Investors wishing to take advantage of a stronger housing market have two ETFs to choose from. The ITB shown in Chart 1 is the best way to play the rally in homebuilders. The top five stocks in the ITB, which account for nearly 50% of its weighting, are homebuilders.
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Chart 1
S&P HOMEBUILDERS SPDR HAS YET TO BREAKOUT... The second ETF that offers exposure to the housing industry is the S&P Homebuilders SPDR (XHB). Chart 2 shows that the XHB has yet to clear its 2016 high (and is well below its 2015 high). The ITB shown in Chart 1 has exceeded both of those chart barriers. The XHB/SPX ratio (solid area) has been in a downtrend for the past two years. The reason for its weaker performance is the nature of its stock weightings. The XHB offers wider exposure to housing-related stocks, but less to homebuilders. Its top group is building products (35%). Homebuilders have a smaller 30% weight.
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Chart 2
USING RATIO ANALYSIS TO CHOOSE BETWEEN ETFS... The simplest way to decide between two ETFs is by using ratio analysis. The idea is to pick the one that shows better relative strength. Chart 3 plots a ratio of the ITB divided by the XHB. The ratio has clearly favored the ITB since late 2011 (by a 244% to 180% margin). But that hasn't always been the case. Between 2013 and mid-2015, the falling ratio favored the XHB. The rising ratio has favored the ITB since mid-2015 (see brown arrow). The ITB/XHB ratio has just hit the highest level in seven years. That suggests that the U.S. Home Construction iShares (ITB) (shown in Chart 1) offer a stronger choice than the S&P Homebuilders SPDR (XHB) (shown in Chart 2).
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Chart 3
TWO RETAIL ETFS AREN'T EQUAL ... Here's another good example of why it's important to know the difference between two ETFs in the same group. The black bars in Chart 4 show the VanEck Vectors Retail ETF (RTH) surging to the highest level since last August. By contrast, the red bars show the S&P Retail SPDR (XRT) lagging far behind. The rising RTH/XRT ratio (top of chart) also shows stronger relative performance by the RTH. There again, the reason for the discrepancy is how the two retail ETFs are composed. The XRT includes more retail stocks, but they're equally weighted. The RTH, however, gives greater weight to larger stocks. We need look no further than its three biggest holdings to explain its superior performance.
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Chart 4
AMAZON, HOME DEPOT, AND WAL-MART TURN UP ... The next three charts explain the recent surge in the RTH. Chart 5 shows Amazon.com (AMZN) surging to a new record high. AMZN is the biggest stock in the RTH with a weight of 17%. The second biggest stock (8%) is Home Depot (HD). Chart 6 shows HD climbing to a new record (as part of the rally in housing-related stocks). Chart 7 shows Wal-Mart (WMT) surging on strong volume. Wal-Mart has a 6% weighting in the RTH making it the third biggest holding. The RTH isn't always the stronger choice between the two retail ETFs. But it is now. And now you know why.
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Chart 5
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Chart 6
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Chart 7
S&P 500 VALUE/ GROWTH RATIO LOOKS OVERSOLD... Chart 8 plots a ratio of the S&P 500 Value iShares (IVE) divided by S&P 500 Growth iShares (IVW). Value stocks outpaced growth stocks during 2016 for the first time in four years. Most of that gain took place after the November 8 election because of the surge in financials which are the biggest part of the value fund. Since the start of the year, however, the ratio has slipped. That's mainly because technology stocks (the biggest part of the growth ETF) became the market's strongest 2017 performer. It looks to me, however, like the major trend still favors value stocks. For one thing, the ratio's trend is still higher. For another, the ratio's 14-day RSI line (top of chart) is in oversold territory near 30. The uptrend in the ratio is a vote for a stronger economy. That's because value stocks need a strong economy to pull their shares higher. The second biggest sector in the value ETF is healthcare which is behind technology as the second strongest sector in the new year. The Healthcare SPDR (XLV) has just achieved a bullish breakout and is starting to attract new attention. That may reflect rotation into cheaper parts of the market that offer value. It may also explain new buying in housing stocks which have been market laggards.
