Resuming The Rally?

Published on Tuesday, 17 April 2012 19:19 Written by Todd Shriber

All traders and investors know that economic data can move stocks and some sectors are more sensitive to select data points than others. For example, manufacturing news has a tendency to be more significant to industrial stocks than other stocks. Retail sales headlines obviously move retail stocks. And, of course, housing data moves stocks like Home Depot (NYSE: HD) and the homebuilders.

To that end, high beta bulls must been relieved to hear on Tuesday that new permits for new home construction surged 4.5% to a 747,000-unit clip, well above the 710,000-unit rate economists expected. That was good news for the beleaguered iShares Dow Jones US Home Construction Index Fund (NYSE: ITB), one of just two ETFs that are remotely devoted to homebuilders.

The iShares Dow Jones US Home Construction Index Fund had been a shining star among sector ETFs for several months. ITB was flirting with $8 in October 2011. In early March, the ETF was found over $15. Then the trouble started. Risk on was turned off as traders fretted about the usual array of macroeconomic headwinds. Worse yet, those macroeconomic problems included a couple of weak housing data points.

ITB fell, but attempted to rally, only to fail to crack the 52-week high around$15.50. Once that lower high was put in, traders proceeded to punish the fund, sending it down to some firm support just below $14. The fund has since bounced and helped by Tuesday’s positive housing data, ITB was able to muster a close above $14.50.

While ITB does focus primarily on homebuilders and does so more than its rival, the more volatile SPDR S&P Homebuilders ETF (NYSE: XHB), it’s getting a lift from the likes of Home Depot, Lowe’s (NYSE: LOW) and Sherwin-Williams (NYSE: SHW). Of that trio, only Lowe’s has a beta above one and not by much, so it’s fair to say that’s a boring, stodgy group.

Those three stocks are all ITB top-10 holdings and combine for over 13% of the fund’s weight. That’s a good thing because not only are those three names intimately levered to the rebounding U.S. housing market; all three have been on fire for the past six months. Seriously, those stocks have charts that would make plenty of high-beta growth stocks green with envy.

Still, six homebuilders comprise ITB’s top-six holdings, combing for about 43% of the fund’s weight. Translation: Those stocks, along with the aforementioned residential real estate discretionary plays, absolutely need more bullish housing data if they want to build on their 2012 gains. At this point, the way to trade ITB might be to wait for a strong volume break of $15, which could spark a new wave of buying pressure.