Why Builders Might Get Housed

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Tomorrow’s a big day for homebuilders, but will it matter?

Housing starts and building permits for April are both due at 8:30 a.m. ET. Good or bad, traders might look past those headlines given what’s been happening in the price action.

Some of the biggest companies in the industry have struggled to move higher despite strong earnings and a promising backdrop of low inventories. Just look at D.R. Horton (DHI), which is on pace for its worst close since October despite good results on April 26. Lennar (LEN) hit a high-water mark following its numbers in early April, only to bleed steadily lower since. PulteGroup (PHM) has staggered on the heels of a quarter loaded with good news.

Those are the three biggest members in the iShares U.S. Home Construction ETF (ITB). Take a look at the chart below. Not only is it about to have a “death cross” as the 50-day moving average falls through the 200-day moving average. It’s also made successively lower highs each time it bounces at support around $38. Technical analysts call that a bearish descending triangle, with the potential to suggest a break to new lows is coming.

Beyond good news at the company level, investors have been wary of rising interest rates. After all, just because younger Americans might want to own a house doesn’t mean they can afford the monthly payments. There may also be concern about profitability in the sector — especially after higher commodity prices squeezed margins at key suppliers like Mohawk Industries (MHK) and Masco (MAS).

In conclusion, homebuilders have slid lower all year, and now some traders may be looking for more downside.

iShares US Home Construction ETF (ITB), with bearish triangle and moving averages showing potential death cross.
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.