The Most Bullish Number We’ve Seen in 25 Years…
It took long enough — but bullish news is finally catching up with the homebuilder rally.
When we last dove into the numbers propelling the homebuilder comeback, the smartest guys in the room were turning against the sector due to extensive hurricane damage in Florida and Texas.
The worst storms to hit the Southeast in decades and labor shortages are weighing on sentiment and will probably remain a drag on new construction, the housing market bears reasoned. One report notes Florida has been responsible for 10% of the building permits issued in the U.S. this year. Postponing projects and all the FEMA red tape is probably not a good sign for anyone looking for construction to accelerate heading into the final months of 2017…
Naturally, economists’ September new homes sales forecasts weren’t overwhelmingly bullish. Most of the pencil-pushers told us to look for small declines in sales.
They weren’t expecting this:
September saw the largest single-month increase in new home sales since 1992.
Yes, you read that correctly…
“Purchases of newly built single-family homes—a narrow slice of all U.S. home sales—increased 18.9% to a seasonally adjusted annual rate of 667,000 in September from the previous month,” the WSJ reports. “That put new home sales at the highest level since October 2007.”
So much for a slowdown.
If any of these economists bothered to look at a chart, they’d quickly realized something big is happening in the homebuilding sector.
Instead of correcting during this year’s busy hurricane season, we’ve watched the trend of the iShares U.S. Home Construction ETF (NYSE:ITB) accelerate over the past two months. It’s now up more than 40% year-to-date. Compare this performance to Nasdaq Composite, which is currently the strongest of the major averages. It’s up about 21% in 2017. That’s right — the forgotten homebuilders are even doubling-up the red-hot tech trade…
It’s not difficult to figure out what’s going on here. Homebuilders need to ramp up production to meet consumer demand after sitting on their hands for the better part of the last decade. Supply is tight. As millennials continue to grow up and jump into the housing market, homebuilders are going to need to catch up.
This is one of the many reasons we’ve remained bullish on the industry for the better part of the past two years. The iShares U.S. Home Construction ETF has remained in our longer-term trading portfolio since February. Of course, we remain bullish on the homebuilders heading into the fourth quarter. While we originally suspected some of these stocks would need to blow off some steam after a strong September run, they’ve once again ripped to new highs this month. The new bullish data we’re seeing this week is just icing on the cake.
We’re going to hang onto our longer-term ITB position even as the sector stays overbought heading into the final week of October trading.
But we’re going to lock in gains of approximately 30% on the rest of our DR Horton Inc. (NYSE:DHI) position today. We first added this homebuilder to the portfolio in March as breakouts rippled throughout the sector. DHI has been good to us, giving us multiple chances to buy shares in the spring and summer. Now that the stock has extended its big breakout move over the past few weeks to hit new all-time highs, we’re ready to ring the register.
While we are selling our DHI position today, we remain bullish on the homebuilders in the long-term. We’re simply taking advantage of the October rally to sell this stock right at its highs.
We’ll keep a close eye on the sector to see if it offers up any more buying opportunities when we finally see a homebuilder pullback…