Chart of the Day: Time to Get Out of the Homebuilders ETF?

By RiskReversal.com  FEB 05, 2013 12:15 PM

The XHB exchange-traded fund is close to flat, while the US market is up almost 1%. That loss of relative strength is an early signal that a pullback is imminent.

 


SPDR S&P Homebuilders ETF (NYSEARCA:XHB) has doubled since its low on October 2011. That’s extraordinary performance for any asset, but especially for an ETF in which no component comprises more than 4% of the fund.  In fact, XHB has 34 single stock components, and the ETF is close to equal weighted. So, the mean performance of 34 single stocks is more than 100% gain in the past 16 months.  Quite astounding.

The chart of XHB has traced out a nice trend channel since its October 2011 low:


18-month chart of XHB, Courtesy of Bloomberg

With the ETF now near the upper end of the trend channel, I expect that a pullback is imminent. In the past week, XHB has already shown signs of weakness, as the broader market is flat, while XHB is down 2% in that span.  Today, the ETF is close to flat, while the US market is up almost 1%. That loss of relative strength is an early signal that a pullback is coming.

Where do I expect XHB to find support?  The 26-26.5 area was prior resistance in Sept.-Dec. 2012, and that prior resistance will likely act as support on the way down.  In addition, the trend channel support comes in around that same area as well.

Regardless of the technical situation, I’ve mentioned before that I see much better ways to play the upside story (like Ford (NYSE:F)) in housing than homebuilders here.  Homebuilders have more than priced in the housing recovery, and now trade quite expensive to their historical valuation metrics, and extremely expensive versus other companies indirectly exposed to the housing recovery.  The market is currently offering a gift to homebuilder longs.  If I were them, I would take it, and get out of this sector for now.

This item by Enis Taner was originally published on RiskReversal.com.

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