Trading By the Numbers: Time to Trim Gains in Homebuilders?

You know there has been a shift in sentiment when some of the most overbought exchange-traded funds in the market are tied to housing.

Who knows whether the surges higher in ETFs like the SPDR S&P Homebuilders ETF (XHB), up 4% on Friday, or the iShares Cohen & Steer Realty Majors Index Fund ETF (ICF), which gained well over 3% on Friday are due to massive short-covering or speculative, value-oriented purchases on the long side. But the fact of the matter is that these funds have rallied to levels from which, historically speaking, they have tended to underperform – if not reverse and move lower.

XHB, for example, has closed up for three out of the past four trading days, and has been bobbing in and out of overbought territory below the 200-day moving average for more than a week. Trading in bear market territory since July, the ETF is now trading at its highest level since early August.

ICF has spent half as much time in bear market territory as XHB, though ICF is also up three out of the past four trading days. Trending upward since closing at an oversold low near the beginning of the month, shares of ICF are now at their most overbought since that rally began nearly three weeks ago.

Finishing overbought for three out of the past four trading days is the iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB). Like ICF, ITB finished well above 3% in Friday’s trading and is trading near its highest, most overbought levels of the month. The last time ITB rallied to these kind of short term overbought levels, the ETF lost more than 3% over the next three days.

The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.

David Penn is Editor in Chief of