Home Construction ETF Is Overbought, While Two Banking ETFs Have Negative Weekly Charts

Investors seeking market exposure to the housing market and banking system can invest without picking stocks by trading these three exchange-traded funds.

The iShares U.S. Construction ETF (ITB - Get Report) has 44 components involved in home construction heavily weighted to homebuilder stocks. D R Horton (DHI - Get Report) and Lennar (LEN - Get Report) are by far the largest components with weightings of 12% and 11%, respectively.

The iShares U.S. Regional Banks ETF (IAT - Get Report) has 54 components that are considered regional banks, but does not include the four "too big to fail" money center banks. US Bancorp (USB - Get Report) and PNC Financial (PNC - Get Report) are by far the largest components, with weightings of 17% and 11%, respectively. These banks are most likely to be involved in mortgage lending, credit cards and small-business lines of credit.

The First Trust Nasdaq ABA Community Bank Index Fund (QABA - Get Report) has 160 components that are smaller publicly traded banks. These banks fund construction and development loans and commercial real estate loans for new communities and strip malls.

Before we look at the weekly charts and key levels for these ETFs, let's look at the most recent housing market data.

Here's the latest S&P Core Logic Case-Shiller Indices
Here's the latest S&P Core Logic Case-Shiller Indices

The 20-City Composite had a year-over-year seasonally adjusted rise of 5.7% in January, up from 5.6% in December. The seasonally adjusted month-over-month gain was 0.9% in January the same as in December. From the July 2006 peak to the March 2012 trough, prices were down 35.1%. From the trough to the current level, home prices are up an unsustainable 43.8% and just 6.6% below the peak.

February New Home Sales
February New Home Sales

This chart above shows sales of newly built single-family home sales for February totaled a seasonally adjusted 592,000, up 6.1% from the revised rate of 558,000 in January. Note how the 600,000-unit threshold has been a magnet since 1963. Note that the housing market bubble peak in mid-2016 was near the 1.6 million-unit total. This chart clearly shows that the sales pace for new homes is significantly below potential.

The National Association of Home Builders reports that the inventory of new homes for sale totals 266,000 in February, a 5.4-month supply. The median sale price of a new home continues to decline. The current medium of $296,200 is down from $312.900 in January and down from $322,500 in December.

April is known as "New Homes Month." The National Association of Homebuilders stated that home building accounted for 15.6% of fourth-quarter GDP. Single-family home construction is thus a key driver of economic growth on Main Street, USA. The NAHB opines that continually building 100 homes creates nearly 300 full-time jobs, and $28 million in wage and business income.

Over the past 12 months, homebuilders and remodelers added 136,000 jobs and total residential construction employment now totals 2.7 million jobs.

Home Construction ETF (ITB)
Home Construction ETF (ITB)

The construction ETF closed Wednesday at $31.59, up 15% year to date and in bull market territory 25.6% above its post-election low of $25.16 set on Nov. 9. ITB set a multiyear intraday high of $32.65 on March 16, a day after the Federal Reserve raised the federal funds rate.

The weekly chart for ITB is positive but overbought with the ETF above its key weekly moving average of $31.07, and well above its 200-week simple moving average of $25.86. Weekly momentum is projected to slip to 86.96 this week, still well above the overbought threshold of 80.00.

Trading Strategy: Buy ITB on weakness to my monthly and quarterly value level of $28.95 and $28.30, respectively. Sell strength to my annual risky level of $32.63.

Regional Bank ETF (IAT)
Regional Bank ETF (IAT)

The regional bank ETF closed Wednesday at $43.93, down 3.2% year to date, but hanging onto bull market territory 20.1% above its post-election low of $36.58 set on Nov. 8. IAT is in correction territory 10.8% below the post-election high of $49.24 set on March 1.

The weekly chart for IAT is negative with the ETF below its key weekly moving average of $45.49 and still well above its 200-week simple moving average of $34.86. The weekly momentum reading is projected to slip to 45.35, in a strong downtrend below the overbought threshold of 80.00.

Trading Strategy: Buy the regional bank ETF on weakness to my annual value level of $39.38. Sell strength to weekly risky level of $46.43.

Community Bank ETF (QABA)
Community Bank ETF (QABA)

The community bank ETF closed Wednesday at $48.98, down 7.2% year to date but slipping below bull market territory up 18.6% above its post-election low of $41.31 set on Nov. 9. The ETF set its post-election high of $54.54 on March 2, and is in correction territory 10.2% below this high.

The weekly chart for QABA is negative with the ETF below its key weekly moving average of $50.95. The ETF is still well above its 200-week simple moving average of $38.11. The weekly momentum reading is projected to slip to 40.58 trending below the overbought threshold of 80.00.

Trading Strategy: Buy the community bank ETF on weakness to the 200-day simple moving average rising at $45.89. My quarterly value level is $49.42. Sell strength to my weekly risky level of $51.48.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.