Everybody Still Hates Homebuilders – That's Why You Should Love This Trade

Despite all the market’s bellyaching over looming interest rate hikes, it’s time to get bulled up on homebuilder stocks.

After a deluge of housing data during this short trading week, it’s clear that the housing market has stabilized. The latest S&P/Case-Shiller Home Price Index numbers released yesterday showed a 4.9% increase through September. Yes, there are outliers in the group—like ridiculously high prices in San Francisco. But for most of the nation, the housing market is reverting to, well, normal again…

“After years of volatility, home price growth appears to have stabilized at an annual rate of around 4% to 5%,” The Wall Street Journal reports. “Economists said prices, sales and new-home construction are likely to continue to grow moderately going into next year as the market continues its return to normal.”

We took our sweet time returning to normal as we’re officially one full decade removed from the housing bubble. And after ten years of little to no substantial gains in the ol’ homebuilder stocks, it’s finally time for these puppies to get moving.

Homebuilders Blast Off

As you might already know, the homies have been our most reliable trade of 2015—despite some choppy trading from the group over the past several weeks. The iShares Dow Jones U.S. Home Construction ETF (NYSE:ITB) is still up more than 5% over the past six months. That’s compared to a 2% loss posted by the S&P 500.

In fact, this is our only long-term trade of the year that has survived this far into the year. The August rout triggered tons of sells in our long-term and short-term positions. But the homebuilders managed to hang on tight during the summer correction.

Now they look ready to blast off thanks to a strong breakout this month…

If you’ve been hanging around here for any length of time, you know that we aren’t Johnny-come-lately’s to the homebuilder party. In fact, we jumped on the homebuilder bandwagon more than a year ago.

“Getting bulled up on housing in late 2014 was reason enough to get carted off to the funny farm,” I reminded you back in October. “But now, the homebuilders are beginning to show new signs of life. These stocks survived the August swoon and are still in the green this year…”

But it wasn’t until this week that the homebuilders really started to shine. Old Blackheath Companies managing partner Jeremy L. Hill notes that both the S&P Homebuilders Index and the iShares Dow Jones U.S. Home Construction ETF have underperformed the S&P 500 over the past month and the past three months.

“Perhaps this is mortgage rate anxiety or fears of a slowing U.S. economy?” Hill asks.

Maybe…

But if we look closely at the charts, it’s clear that there’s a major breakout in the works. Both the S&P Homebuilders Index and the iShares Dow Jones U.S. Home Construction ETF (NYSE:ITB) are turning sharply higher. The choppy holding pattern that’s gripped these names since early August looks ready to take a backseat to gains.

The housing bull is back in action. Grip it by the horns and ride it to gains…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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