With the weather getting colder and the nights longer, both the business of home-buying and home-building are likely done for the season.
But you wouldn’t know that simply from looking at the performance of exchange-traded funds linked to the homebuilding industry, which are short-term overbought and enjoying the confidence – if not complacency – of traders and investors.
It is worth remembering that the strength in homebuilding ETFs will increasingly attract both sellers and short sellers. As such, these funds have started to reveal sizable negative edges, warning traders that lower prices in the near term for these funds is becoming a matter of when rather than if.
And there may be no better example of this than recent price action in the iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB). Up four out of the past five trading days and gaining more than 3% ahead of trading on Wednesday, ITB has the largest negative edges out of all the non-leveraged exchange-traded funds in our database.
How did ITB get that way? Shares of the ETF have been trading in bear market territory on a consistent basis since early July. The fund fell by more than 34% before reaching a bottom in the first few days of October. Since those lows, the fund is up almost 34% and is trading near its highest levels since early August.
In recent days, however, the fund has been moving quickly toward levels from which, historically, the ETF has tended to reverse and move lower. Just such a reversal is what occurred in the ETF a little over a week ago when, after rallying for five out of six trading days and finishing in overbought territory, shares of ITB sold-off sharply, losing more than 6% in three days.
Similar short tem rallies in mid-October and late September were also met with quick sell-offs lasting from a few as one to as many as five trading days.
ITB includes among its components homebuilding stocks like Pulte Homes Inc. (PHM), which finished higher by more than 4%, and D.R. Horton (DHI), up 3%. Reviewing just a few of the fund’s holdings makes plain how the ETF could be so overbought. Heading into trading on Wednesday, even the ITB’s laggard, NVR Inc. (NVR) finished in positive territory on Tuesday, and had closed higher for four out of the past five trading days.
Quantified data and research on exchange-traded funds like ITB is available each evening after the market close. To learn more, click here.
David Penn is Editor in Chief of TradingMarkets.com