It’s Time to Bail on the Homebuilders
The market teetered on the brink at the beginning of the second quarter.
Investors were sweating a deeper correction as the major averages struggled to bounce near their February lows. Trade war fears convinced many folks to head for the exits. A total breakdown appeared imminent.
That’s when the buyers stepped in…
By the end of the first week of April, stocks had given investors a big bounce right when they needed it most. The tech-heavy Nasdaq Composite took the lead and most of the sagging FANGs clawed their way into positive territory. Things were finally looking up.
Naturally, we were scouring the market for the strongest dip-buying prospects. As I watched the market comeback unfold in real time, I noticed one group of stocks sneaking higher while the averages were still fighting for traction: homebuilders.
We’ve been riding the new building boom since early 2017 thanks to our long-term position in the iShares U.S. Home Construction ETF (NYSE:ITB). Overall, ITB has been good to us, rising from $30 to a high of more than $46 in just 12 months. The homebuilders were even beating the performance of some of the strongest tech stocks on the market during the final months of 2017.
But the February correction hit these stocks especially hard. A January losing streak turned into a six-week bloodbath, sending ITB back to prices we hadn’t seen since October. It’s only gotten worse from there. ITB is stuck deep in the red on the year. Our position is down almost 15% year-to-date.
We made a play at a potential bounce in early April as ITB began to stabilize at a critical support level (it jumped almost 5% in one day, bouncing off its 200-day moving average back toward its March highs). It was the spark we had been looking for to get the homebuilders back on track.
But the bounce didn’t stick. Despite strong earnings from some of the industry’s biggest players, homebuilders failed to gain significant traction last month. Now we’re witnessing an ugly breakdown in the homebuilders as the industry knifes through support.
We stuck to our bullish call on homebuilders earlier this year as these stocks consolidated just above their lows. Spring home buying season was just around the corner — and the supply of starter homes was down more than 14% from last year, with more reasonably priced homes in shortest supply.
In fact, homebuilders still need to ramp up production to meet consumer demand after sitting on their hands for the better part of the last decade. As millennials continue to grow up and jump into the housing market, homebuilders are struggling to keep up with demand.
But none of this matters as ITB breaks down. I’m still bullish on homebuilders in the long run. But we don’t want to own these stocks as the market turns against them. Investors are fixated on the 10-year yield jumping above 3% and whether home sales will take a hit due to rising rates. We have to respect that and get out of the way for now.