Following Tuesday’s shake-up, stocks have responded after the indexes made contact with their respective 26-day averages. While some weak hands might have nervously banged their discount-broker’s sell button, the rebound wasn’t a shock to our newsletter readers.
Our crack research team alerted our readers not to worry and to take advantage of the dip. Why was ETF Stocksso confident stocks would U-turn? Our analysis revealed that, in the last decade, a sustained rally has NEVER died on its first violation of shorter-term averages like the 10 and 12-day.
We won’t start to worry about the health of the market until the NASDAQ pierces and closes below support at 2900 or its 50-day average – whichever is lower at the time of the breach.
Until then, ETF Stocks will stick with the trend and continue to look for buy candidates. One of our favorite idea generation tools is our ETF Performance Heatmap. The trick is to look for similar exchange traded funds that have floated to the top of the leaderboard.
On Wednesday, the top three and four of the five best performing ETFs were homebuilding related. That trend continued on Thursday with two of the top six and three in the upper 20.
iShares Dow Jones U.S. Home Construction (ITB)
SPDR Series Trust SPDRHomebuilders (XHB)
PowerShares Dynamic Builders & Construction (PKB)
Any of the above should work well for more conservative investors that want exposure to the industry. However, ETF Stocks likes to focus on the equities the ETFs have in common. Identify the companies powering the funds higher, and you likely to have latched onto a winner if the sectors remains hot.
We found eleven companies that are in at least two of the Homebuilder ETFs:
Lennar Corporation (LEN)
PulteGroup, Inc. (PHM)
Owens Corning Inc. (OC)
Ryland Group, Inc. (RYL)
D.R. Horton, Inc. (DHI)
USG Corporation (USG)
Masco Corporation (MAS)
Toll Brothers Inc. (TOL)
M.D.C. Holdings, Inc. (MDC)
Mohawk Industries, Inc. (MHK)
Lennox International, Inc. (LII)
Equipped with this target list, you might consider putting a few dollars in a few of your favorites. Based on the combination of our technical and fundamental analysis, ETF Stocks prefers Lennar Corporation (LEN), Owens Corning Inc. (OC), and Lennox International, Inc. (LII).
If you are worried that Tuesday’s jolt was a warning sign of a bigger slide to come, more sophisticated investors could employ what we call a ZERO Trade. It works like this.
You invest and equal dollar amount in some combination of the stocks which are outperforming the underlying ETF. For example, you buy $10,000 in each of our highlighted favorites, for a total of $30,000. The next step is to short $30,000 of any of the three Homebuilder ETFs mentioned above.
Your account has a $30,000 debit for the purchase of the three stocks, and a $30,000 credit for shorting the ETF; hence, the name ZERO Trade. Minus commissions, margin interest and any other account fees, as long as the stocks continue to outperform the fund, you’ll profit no matter which way the stock market goes.