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


Our representative for the homebuilders is the iShares fund,
Dow Jones U.S. Home Construction Index Fund

  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:


Note for New Readers

Our weekly ETF Update is designed to assist both investors and
traders interested in ETF’s and Sector Rotation.  Before turning to the
current rankings, let us undertake a review for readers new to this

Our Method.  In this past article,
we described our basic methodology and why we believe the rankings are
useful for fundamental traders and technical traders alike.  While we
urge readers to check out the entire article, the key point is that
ETF’s pose challenges and opportunities different from investment in
individual stocks.  The fundamentals may be more difficult to assess. 
Even with a good grasp on fundamental trends, there is a lot of
technically-based trading in ETF’s.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the “hot money” moves.  Here is an article on that point.

The system synopsis.
We look at Trending sectors, Cyclical Sectors, and build in an element
of Anticipation for both entry and exit — thus the name of the model,
TCA-ETF.  While we do not reveal the exact methodology for spotting
trends and cycles, the system is not a “black box.”  The basic elements
are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings
each week, now on the weekend with a one-day delay, using the Thursday
output from the model.  We monitor and trade this daily, and offer a
free report (request via the email address on the top left of the site)
for those interested in our weekly trading program.

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