Why You Should Care Banking ETFs Are Crushing Construction ETFs

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

The iShares U.S. Construction ETF (ITB) has 44 components involved in home construction. The largest holdings in this exchange-traded fund are D R Horton (DHI) and Lennar (LEN) with weightings of 12.64% and 10.98%, respectively.

The iShares U.S. Regional Banks ETF (IAT) has 54 components that are considered regional banks, but does not include the four "too big to fail" money center banks. The largest holdings in this ETF are US Bancorp (USB) and PNC Financial (PNC) are the top two holdings with weightings of 17.1% and 10.9%, respectively.

The First Trust NASDAQ ABA Community Bank Index Fund (QABA) has 160 components considered smaller publicly-traded banks. The largest holding of this ETF is now East West Bancorp (EWBC) with just a 3.16% weighting.

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.

 

The key 20-City Composite had a year-over-year seasonally-adjusted rise of 5.3% in November, up from 5.1% in October. The seasonally-adjusted month-over-month gain rose to 0.9% in November versus 0.6% in October. 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 43.3% and just 7.0% below the peak.

 

This chart above shows sales of newly built single-family home sales for December, population-adjusted. New home sales fell by 10.4% in December to a seasonally-adjusted annual rate of 536,000 units. For all of 2016, sales were up 12.2% to 563,000, the highest annual rate since 2007. 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 rose by 10% in 2016. Building homes on speculation could become a problem given the higher prices and higher mortgage rates. As an additional warning on of the latest readings on mortgage applications came in at a 13-year low. The median sale price of a new home was reported at $322,500, which appears as a reach for the average family on Main Street, USA.

 

The chart above shows existing home sales for December. This broader measure of home sales slipped to a seasonally adjusted annual rate 5.49 million units down from 5.65 million in November. Continuing a trend above the 5.5 million sales rate is the important milestone to track, as this level had been a ceiling since 2009, well below pre-crash levels. The National Association of Realtors put a positive spin on this data, touting that existing home sales for 2016 was the highest in a decade. The graph tells the true story!

Now, here are the weekly charts and key levels for the three ETFs.

The weekly chart shows 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 charts 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. A positive weekly chart shows the stock above its key weekly moving average with weekly momentum rising above 20.00 in a trend towards 80.00.

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

 

Courtesy of MetaStock Xenith

The construction ETF trades at close to at $29, up 5.1% year to date and up 14.8% from its post-election low of $25.16 set on Nov. 9. ITB is 4.1% below its post-election high of $30.14 set on Jan. 26.

The weekly chart for ITB shifts is positive with the ETF above its key weekly moving average of $28.21, and above its 200-week simple moving average of $25.56, last tested as the "reversion to the mean" during the week of Nov. 11 when the average was $25.28. The weekly momentum is projected to rise to 68.35 this week up from 67.06 on Jan. 27.

Investors looking to buy the home construction ETF should do so on weakness to $25.56, which is the 200-week simple moving average. I show monthly and quarterly pivots of $28.33 and $28.81, respectively. Investors looking to reduce holdings should sell strength to $31.07 and $32.61, which are key levels on technical charts until the end of June and 2017, respectively.

Here's the weekly chart for regional bank ETF.

 

Courtesy of MetaStock Xenith

The regional bank ETF trades at close to $46, up just 0.7% year to date, but in bull market territory 25% above its post-election low of $36.58 set on Nov. 8. The post-election high has been $46.68 set on Jan. 26.

The weekly chart for IAT is positive but extremely overbought with the ETF above its key weekly moving average of $44.84 and well above its 200-week simple moving average of $34.02, last tested as the "reversion to the mean" during the week of July 8, 2016 when the average was $31.96. The weekly momentum reading is projected to slip to 91.43 this week down from 91.01 on Jan. 27, with both readings well above the overbought threshold of 80.00.

Investors looking to buy IAT should buy weakness to $43.58, $39.38 and $38.46, which are key levels on technical charts until the end of February, the end of 2017 and the end of March, respectively. Investors looking to reduce holdings should consider selling strength to $48.17, which is a key level on technical charts until the end of June.

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

 

Courtesy of MetaStock Xenith

The community bank ETF trades near $51.50, down 2.4% year to date but in bull market territory up 24.7% from its post-election low of $41.31 set on Nov. 9. The ETF set its post-election high of $54.28 on Dec. 12.

The weekly chart for QABA is positive but overbought with the ETF above its key weekly moving average of $51.30 and well above its 200-week simple moving average of $37.06, last tested as the "reversion to the mean" during the week of Feb. 12, 2016, when the average was $32.91. The weekly momentum reading is projected to slip to 82.11 this week down from 85.64 on Jan. 27. A close this week below $51.30, which pulls momentum below the overbought threshold of 80.00, results in a downgrade to a negative weekly chart.

Investors looking to buy QABA should do so on weakness to $50.77 and $46.63, which are key levels on technical charts until the end of February and the end of March, respectively. Investors looking to reduce holdings should do so on strength to $54.80, which is a key level on technical charts until the end of June.

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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