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ETF Outlook: SPDR S&P Homebuilders ETF (XHB)

Every Wednesday, Marc Chaikin applies his groundbreaking analysis to an ETF or a sector. Today, he looks at SPDR S&P Homebuilders ETF (XHB).



The Homebuilders Group has been underperforming the overall stock market for the better part of the past 12 months. From a severe oversold condition in late July, the XHB has retraced 50% of the decline from its February peak and is now overbought and right at overhead resistance. The rally, while welcome, leaves the XHB 10% under its February peak and significantly lagging the market.

Stocks in the Homebuilders Group responded very positively to the Commerce Department’s July U.S Home construction report yesterday which saw sharp increases in both single family and multi-unit housing starts. The sharp increase beat Wall Street’s expectations and reversed declines in housing starts in May and June.

Overall, home construction was up almost 16% in July with new permits up as well. This report comes on the heels of Monday’s report from the National Association of Home Builders that showed increased confidence on the part of builders. The group was also helped by Home Depot’s (HD) very bullish quarterly report before the opening. HD reported a 22.6% increase in quarterly earnings, handily beating analyst’s estimates.

The rapid two day advance in home builders like KB Homes (KBH), Lennar (LEN) and Toll Brothers (TOL) has seen these beaten down stocks rally 5-6% on top of 5-6% gains in the prior week. The rubber will meet the road later this week when Toll Brothers reports their 3rd quarter 2014 earnings on 9/21, followed by KB Homes and Lennar next week.

It may be that the worst is over for the Home Builders, but this rapid advance based on one month’s data may not hold up. It is well to ask why these stocks were making new lows recently when they had consistently reported positive earnings surprises over the past 4 quarters.

This underperforming group is a good sell candidate. In addition, our Portfolio Health Check can help you zero in on the strongest and weakest stocks in the XHB and encourage you to trade on the right side of the market with those bullish stocks, while avoiding or shorting the bearish rated ones.

The Chaikin Power Bar indicates that only 3 stocks in the XHB have a bullish Chaikin Power Gauge rating while 10 have a bearish rating.

Investors who want some participation in the Homebuilders Group should avoid the XHB ETF for now and wait for the earnings reports from key players in the group over the next week. The strongest stocks in the XHB, based on their Chaikin Power Gauge ratings are MDC Holdings (MDC) and NVR Inc. (NVR) which can be bought on pullbacks over the short-term. These stocks are likely to outperform the XHB ETF itself.

The Chaikin Portfolio Health Check is an excellent tool to help zero in on the weakest stocks in any ETF. With the SPDR S&P Homebuilders ETF (XHB) showing a plurality of bearish stocks, it is the most effective way to identify stocks to avoid in the XHB.

By looking at the individual component stocks through the lens of the 20 factor Chaikin Power Gauge rating, you can easily find the stocks in this underperforming ETF with the weakest potential over the next 3-6 months. These are the stocks to avoid as this weak sector is likely to continue to underperform.

The Chaikin Power Grid in Portfolio Health Check (see below) maps stocks and industry groups from strong to weak so you can easily determine the best and worst stocks in any ETF. To find the strongest stocks in the XHB, we look to the right quadrant of the Power Grid (strong Power Gauge stocks) where we find stocks with the best potential for price gains over the next 3-6 months. There we see MCD and NVR.

The weaker stocks in the XHB include: Lennar, Lumber Liquidators (LL), Pier One Imports (PIR) and Toll Brothers. Don’t chase these stocks which have retraced 50 – 60% of their recent losses, but rather consider selling them to better position your portfolio in stocks with positive potential over the next 3-6 months based on the Chaikin Power Gauge rating.

Over time, strong stocks in strong industry groups will outperform weak stocks in weak groups.

One stock to avoid and consider shorting in the weak Homebuilders ETF is Lumber Liquidators which recently reported very disappointing earnings and guided lower for the balance of 2014. The stock was up 2% yesterday after being almost comatose for the past month. There are trapped longs just waiting for a relief rally in LL which may never happen, given their bearish outlook for the balance of 2014.

Stocks with bearish Chaikin Power Gauge ratings which report disappointing earnings in a weak industry group are a losing bet.


Chaikin Portfolio Health Check

Chaikin Power Gauge rating

NASDAQ Chaikin Power Indexes

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

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