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.
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.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter