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Keep Your Eye on These Two Homebuilding Components


Home construction is showing relative strength

There is a lot of red on my screen today, but I do see a bright spot in the iShares Dow Jones U.S. Home Construction Index Fund (ITB), which is up about 0.8% at last check. The ITB is a basket of the major builders of residential homes. It is having a strong year so far, up around 43% year-to-date, and up almost 37% year-over-year. Looking at the chart below, the ITB made a late-June breakout out of an ascending triangle to close at multi-year highs. Currently, shares have been trading in a consolidation zone between $16.50 and $17.30, just above its breakout level. Let's look at a couple of the components of the ITB and see how they are trading.

The Ryland Group, Inc. (RYL) is having a good day, up roughly 3.7%. It is up over 69% year-to-date, and is trading near multi-year highs. I see continued pessimism among analysts, as six out of nine rate the shares a "hold" or worse. Although, Goldman Sachs this morning did upgrade RYL to "neutral" from "sell." Over the past 10 trading days, put buying has outnumbered call buying by a margin of almost two-to-one. Additionally, short interest is at a lofty 21% of the float.

Toll Brothers Inc (TOL) actually made a new multi-year high of $31.11 this morning. Shares are up 0.7% today, and up over 51% on a year-to-date basis. Pessimism continues to surround this name, even though it is in a very strong uptrend. Seven out of 14 analysts rate the shares a "hold" or worse. Like Ryland, put buying has been near an extreme over the past 10 days, with almost two puts being purchased for every call. Short interest remains high, representing nearly 8% of the float.

With these names combining a strong industry, strong technicals, and extremes in pessimism, the recipe for strong buy candidates is quite ideal.

This article by Tony Venosa was originally published on Schaeffer's Investment Research.

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