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The Home Construction Bull Market You Never Saw Coming


Ever thought Home Construction would be one of the standout performers in the fourth quarter? Strength may be an early sign that things won't fall apart despite European woes.

"I'm dumbfounded, but nothing surprises me in this game."
--Francis Lee

One of the most interesting parts about the market's rally off of the October lows (the start of the "Fall Melt-Up") is the performance of all things homebuilder-related. While many are arguing home prices still have much further to fall, it appears that investors in the industry are taking on a completely different view.

Take a look below at the price ratio of the iShares Dow Jones U.S. Home Construction ETF (ITB) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/ITB is outperforming (up more/down less) the denomination/IVV.

On both a relative and absolute basis, the ETF has effectively completely undone the August/September Summer Crash while broader stock market averages are still struggling to get to those levels. The ETF has a number of homebuilders and home improvement retailers, ranging from Lennar (LEN) to Home Depot (HD). It could very well be that investors in the industry are sensing that low long-term interest rates are actually starting to have an effect on economic growth expectations. Make no mistake about it – this is quite a bullish sign. Let us not forget that before Europe got into the headlines, the biggest drag on the economy and markets was home prices. And yet, investors in the home construction industry are bringing significant strength back into the group.

The trend remains intact, and seems to be "decoupling" from all other industry groups in the market. I've seen studies that suggest that when construction stocks do well, markets tend to follow in the months ahead. Continued leadership in home construction then may be signaling that the world actually won't fall apart as a result of Europe. More importantly, though, may be what happens to the yield curve as a result. After all, if expectations are rising that homebuilders will fundamentally perform better, that likely occurs through some kind of pickup in long-term borrowing. This ultimately would be bearish for bonds (rising demand for money increases yield), and bullish for the stock market.

Twitter: @pensionpartners

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No positions in stocks mentioned.

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