You guys want to hear a funny story?
Let me take you back to simpler times back in 2006 when you used to hear things like, “Real Estate only goes up” and “God only made so much land”. Heck, you may have even said those things yourself.
But it was the brilliant market timers at the ETF companies that really stole the show. The iShares U.S. Home Construction Fund $ITB launched on May 1, 2006, and here’s what it did immediately after that:
Meanwhile, the SPDR S&P Homebuilders ETF $XHB launched on January 31, 2006, and here’s what it did immediately after that:
It doesn’t get better than that does it? Classic human behavior at work. Their timing was impeccable.
So now fast forward almost 14 years later and these ETFs still haven’t been able to surpass their issue prices. The original
bag holders purchasers are just now getting back to break-even.
Here’s what the US Home Construction Fund $ITB looks like now:
And here’s what the Homebuilders Fund $XHB looks like now:
Notice the difference in the components and weightings. $ITB has more exposure to actual “homebuilders” and is market cap weighted, while $XHB is more equally-weighted and has other types of companies with exposure to home building.
Either way, they look exactly the same. Although the construction of the ETFs is different (see what I did there?), it’s a behavioral correlation among asset managers. This is a similar phenomenon to Emerging Markets, where different countries have very different economies and exposure, yet they get grouped together from an asset allocation perspective.
So here we are and the homies are flirting with a secular breakout, after close to a decade and half of just trying to get back to where they started.
Consumer Discretionary has been a big focus of ours lately. We laid out a reverse engineered trade on Amazon $AMZN last month that had a lot more to do with the actual market itself and Consumer Discretionary than it did the chart of Amazon. You can see that here: Dec 17. Sean at our Options desk also laid out a beautiful options trade for it as well. You can find that here: Dec 18.
Take a look at Discretionaries going out at new all-time Monthly Closing Highs:
Part of that Discretionary space, of course, is the Homebuilding group. So if Discretionaries are actually going to go, the homies will likely, at least, participate. They don’t have to lead, but they’re probably not crashing if $XLY is ripping as high as we think it can go.
Here is $XHB up close. If they can break them out above those 2006 highs, I think there is another 20% higher from here:
This is what we call the top/down approach. We start with the major indexes (both U.S. and Global) to identify the trend of the asset class, in this case: stocks. Then we go to the sectors themselves, in this case: Consumer Discretionary. And then break that down to the specific industry groups within those sectors, like Retailers and Homebuilders.
If the trend in stocks is up and the trend in Discretionary is up, then the higher probability outcome would be for homebuilders to break out as well, in this unique case, starting a new secular bull market.
So now is when we get down to the individual stocks themselves that provide the best risk vs reward opportunities to express this thesis.
Remember, the idea is not to necessarily buy them all. Part of this is to reiterate the current trends and the abundance of favorable setups to the upside. This is all part of our weight of the evidence approach.
Here are some of the ones that stood out to me: