
3 ETFs to Trade the Volatility in Housing and Banking
Recent housing data has been mixed, and real estate lending from community and regional banks has not returned to pre-crisis levels. Housing prices have become too expensive.
In this environment, investors should reduce holdings on specific stocks and should shift to trading strategies using exchange-traded funds that represent housing, community banking and regional banks. Investors could have some longer-term allocations to these industries, then trade the extreme volatility to capture short-term gains.
The best way to capture industry volatility is by using good till canceled limit orders to buy weakness to key levels below the market, and to use GTC limit orders to sell strength to key levels above the market.
To trade the housing sector, investors should use the iShares U.S. Home Construction ETF (ITB) - Get Report . It has 41 components and is 63.5% weighted to homebuilder stocks.
Community banks provide community developers and homebuilders funding via construction and development loans. The First Trust Nasdaq ABA Community Bank Index Fund (QABA) - Get Report has 139 publicly traded community banks as components. These banks are among the 354 components -- down from 359 a month ago -- of the ABA Community Bank Nasdaq Index. Before the financial crisis, the number of community banks in this index was limited to 500, and there was a waiting list to join.
Regional banks are in business to provide mortgage loans and home equity lines of credit. The iShares U.S. Regional Banks ETF (IAT) - Get Report has 57 components and does not include the four "too big to fail" money center banks. These institutions have been reluctant to lend, given low interest rates and tougher regulatory guidelines.
Before profiling the weekly charts for these three ETFs let's look at the Case-Shiller home price index and new home sales.
The Case-Shiller 20-City Composite for August shows that home prices rose by 5.1% year over year and up 0.1% sequentially. From the peak in mid-2006, the index is down about 12% and is up 36% since the low in March 2012. This is a re-inflating housing bubble.
The index is at 182.47, up from 181.90 in July. This means that a home costs 82.5% more than it did in December 2000, as the median household income in the U.S. peaked in 1999 and ended 2014 down 7.2% since then.
Single family housing starts remain about 60% below potential, and new home sales lagged in September. Sales for single-family homes declined by 11.5% to a seasonally adjusted annual rate of 468,000 units, down from 552,000 in August. The inventory of new homes for sale rose to 225,000 units in September from 216,000 in August, which is a 5.8-month supply, up from a 4.7-month supply at the current sales pace.
These statistics support the notion that home prices are too high, that homebuilders are increasing inventory on speculation, that community banks are increasing the highly speculative construction and development loans, and the regional banks are too stingy on mortgage lending.
Here's the weekly chart for the home construction ETF.
Courtesy of MetaStock Xenith
The home construction ETF had a close of $27.42 on Monday, up 5.1% in the fourth quarter and up 6% year to date. Between a multiyear high of $29.86 set on Aug. 18 and its flash crash low on $23.50 on Aug. 24, "Black Monday," this ETF had a bear market plunge of 21.3%. It currently is at its 61.8% Fibonacci Retracement of the crash at $27.42.
The weekly chart profile is on the cusp of being negative, with the ETF just below its key weekly moving average of $27.53, and with its weekly momentum reading projected to slip to 63.27 this week -- down from 63.41 on Oct. 30. The trend above the 200-week simple moving average began during the week of Jan. 13, 2012, with the average at $12.50, which is now up to $22.70 as the longer-term reversion to the mean.
Investors looking to buy the home construction ETF should place a good till canceled limit order to buy the ETF if it drops to $26.78, which is a key level on technical charts in November.
Investors looking to sell the home construction ETF should place a good till canceled limit order to sell the ETF if it rises to $28.79, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for the community bank ETF.
Courtesy of MetaStock Xenith
The community bank ETF had a close of $40.14 on Monday, up 4.9% in the fourth quarter and up 9.3% year to date. Between a multiyear high of $41.66, set on July 17, and its flash crash low on $35.20 on Aug. 24, "Black Monday," this ETF had a technical correction of 15.5% and is currently above its 61.8% Fibonacci Retracement of $39.21.
The weekly chart is positive, with the ETF above its key weekly moving average of $39.01. The weekly momentum reading is projected to rise 65.65 this week, up from 59.73 on Oct. 30. The 200-week simple moving average lags as the reversion to the mean of $31.99.
Investors looking to buy the community bank ETF should place a good till canceled limit order to buy the ETF if it drops to $37.54, which is a key level on technical charts until the end of 2015.
Investors looking to sell the community bank ETF should place a good till canceled limit order to sell the ETF if it rises to $41.82, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for the regional bank ETF.
Courtesy of MetaStock Xenith
The regional bank ETF had a close of $35.26 on Monday, up 4.5% in the fourth quarter and up 0.9% year to date. Between a multiyear high of $37.99 set on July 23 and its flash crash low on $26.89 on Aug. 24, "Black Monday," this ETF had a bear market plunge of 29.2%. It is currently above its 61.8% Fibonacci Retracement of the crash at $33.74.
The weekly chart is positive, with the ETF above its key weekly moving average of $34.64, and with its weekly momentum projected to rise to 69.82, up from 66.42 on Oct. 30. The 200-week simple moving average lags as the reversion to the mean of $30.35.
Investors looking to buy the regional bank ETF should place a good till canceled limit order to buy the ETF if it drops to $34.88, which is a key level on technical charts for this week only.
Investors looking to sell the regional bank ETF should place a good till canceled limit order to sell the ETF if it rises to $35.74, which is a key level on technical charts until the end of November.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.













