Home Construction Is Weak, Could Hit Community Banks Soon

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

The iShares U.S. Construction ETF (ITB) consists of 46 stocks involved in home construction and includes homebuilders D R Horton (DHI) , Lennar (LEN) and PulteGroup (PHM) as the top three holdings with weightings of 13%, 10.59% and 7.98%, respectively.

The iShares U.S. Regional Banks ETF (IAT) consists of 54 bank stocks and regional banks US Bancorp (USB) , PNC Financial (PNC) and BB&T Corp (BBT) are the top three holdings with weightings of 17.1%, 10.9% and 7.5%, respectively. Note that the four "too big to fail" money center banks are not components of this ETF.

The First Trust Nasdaq ABA Community Bank Index Fund (QABA) consists of 147 smaller banks with Signature Bank (SBNY) the largest component with just a 3.63% weighting.

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

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

 

The key 20-city composite had a year-over-year, seasonally adjusted rise of 5.1% in August, and up 0.2% month over month. 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% and just 7.2% below the peak. Household income has not kept pace with the increase in home prices.

 

This chart above shows new home sales for September. New home sales came in at a seasonally-adjusted annual rate of 593,000 units. This is below originally stated 609,000 units in August, but this rate has been revised lower so that the rate for September increased by 3.1%. This chart clearly shows that the sales pace for new homes is significantly below potential.

The chart above shows existing home sales for September. This broader measure of home sales rose to a seasonally adjusted annual rate 5.47 million units up from 5.30 million units in August. Note that the 5.5 million sales rate continues as a ceiling since 2009, well below pre-crash levels.

Here's the weekly chart for the home construction ETF.

 

Courtesy of MetaStock Xenith

The weekly charts show a red line through the price bars, which is the key weekly moving average (a five-week modified moving average). The green line is the 200-week simple moving average considered the "reversion to the mean."

The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicates overbought and readings below 20.00 indicates oversold. A negative weekly chart shows the stock below its key weekly moving average with weekly momentum declining below 80.00 in a trend towards 20.00.

The construction ETF trades around $25.50, down 6% year to date and in correction territory 15.1% below the July 27 high of $30.00. The ETF is 17.9% above its Feb. 11 low of $21.61.

The weekly chart for the housing ETF is negative but oversold with the ETF below is key weekly moving average of $26.75 and just above its 200-week simple moving average of $25.25. Weekly momentum is projected to decline to 12.50 down from 15.66 on Oct. 28, both readings deep below the oversold threshold of 20.00.

Investors looking to buy the home construction ETF should buy weakness to $20.80, which is a key level on technical charts until the end of 2016. Investors looking to reduce holdings should sell strength to $30.18 and $31.64, which are key levels on technical charts until the end of November and until the end of 2016, respectively.

Here's the weekly chart for regional bank ETF.

 

Courtesy of MetaStock Xenith

The regional bank ETF trades at close to $37, up 4.7% year to date and in bull market territory 30.2% above its Feb. 11 low of $28.12.

The weekly chart for the regional bank ETF is positive but overbought with IAT above its key weekly moving average of $35.77 and above its 200-week simple moving average of $32.84, last tested during the week of July 8 when the average was $31.96. The weekly momentum reading is projected to rise to 84.81 up from 82.86 on Oct. 28 well above the overbought threshold of 80.00.

Investors looking to buy the regional bank ETF should buy weakness to $35.68, which is a key level on technical charts until the end of 2016. Investors looking to reduce holdings should sell strength to $39.30 and $40.19, which are key levels on technical charts until the end of November and until the end of 2016, respectively.

Here's the weekly chart for the community bank ETF.

 

Courtesy of MetaStock Xenith

The community bank ETF trades at $41, up 5.6% year to date and in bull market territory 27.1% above its Feb. 11 low of $32.40.

The weekly chart for the community bank ETF shifts to negative given a close on Friday below its key weekly moving average of $41.15, which indicates risk to its 200-week simple moving average of $35.51, last tested during the week of Feb. 12 when the average was $32.91. The weekly momentum reading is projected to decline to 73.02 down from 77.65 on Oct. 28.

Investors looking to buy the community bank ETF should do so on weakness to $40.65, which is a key level on technical charts until the end of this week. Investors looking to reduce holdings should sell strength to $43.37, which is a key level on technical charts until the end of 2016.

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

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