Oil, Homebuilder ETFs Sink As Market Awaits Fed


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Major ETFs lost ground in quiet trade Tuesday as the market waits for the Federal Reserve to finish a two-day meeting in which it's expected to announce new stimulus measures to boost the economy.

Market Vectors Oil Services ETF ( OIH ), down 2%, was among the biggest decliners of nonleveraged ETFs as oil prices fell 2.11% to $89.74 a barrel. OIH has been lagging the market for 15 months and appears to have hit price resistance at its 200-day moving average.

IShares Dow Jones U.S. Home Construction ( ITB ) andSPDR S&P Homebuilders ( XHB ) were also down 2.14%.

U.S. home prices rose for the second month in a row after seven straight months of declines. Standard & Poor's Case-Shiller home-price data showed a 2.2% increase for both the 10 major metropolitan area index and the 20-city index in May vs. April's readings. On a seasonally adjusted basis, prices rose 0.9%. But on a year-over-year basis, the 10-city index is down 1.0% and the 20-city index is down 0.7%.

The spring and summer months are seasonally strong months for purchases. Downside risk for homebuilders is mounting for the second half of the year, Deutsche Bank analysts say.

"It shouldn't take more than muddle-through economic growth for housing recovery to continue, but the risks are that even that doesn't happen or it happens unevenly against tenuous investor optimism," Nishu Sood and Rob Hansen of DB wrote in a client note last week.

Homebuilder shares are trading at historically high valuations because earnings are still small, they noted. The stocks currently trade at 22.1 times 2013 earnings, which is above their P/E range of 5 to 15 in the 1990s and 2000s.

ITB and XHB are among two of the strongest stock ETFs on the market. ITB rallied a whopping 40% year to date and 42% in the past 12 months. XHB climbed 27% and 30% over those periods. ITB has a stronger IBD Relative Strength Rating, 93, and Accumulation/Distribution Rating, B-, than XHB. ITB appears to be pulling back to its 10-week moving average after hitting a 52-week high earlier this month.

Market Overview

In afternoon trade, the SPDR S&P 500 ( SPY ) shed 0.14%.SPDR Dow Jones Industrial Average ( DIA ) gave back 0.11%.PowerShares QQQ (QQQ), a basket of the 100-largest nonfinancial stocks on the Nasdaq, added 0.23%.

"Right now we have a friendly, some say overly friendly, Federal Reserve and a lot of pessimism on the part of investors," Stephen Todd of the Todd Market Forecast wrote in a client note released Tuesday. "Remember people get bearish at bottoms and bullish at tops."

"Merrill Lynch's proprietary sell-side indicator is at its most bearish in 15 years. Previous visits to this level have resulted in substantial rallies," he added.

The risks of economic and corporate weakness have already been priced into stocks, says Bob Doll, a senior advisor at BlackRock.

"Investors remain focused more on macro trends and issues than on market fundamentals," Doll wrote in his weekly market commentary. "In particular, investors' ability to shrug off a period of earnings weakness as they focus on additional policy help suggests that the current equity bull market still has some legs."

IShares MSCI EAFE Index (EFA), tracking developed foreign markets, lost 0.33%.IShares MSCI Emerging Markets Index (EEM) was nearly flat.

Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: DIA , ITB , OIH , SPY , XHB

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