Yesterday on Fast Money, I got into an argument with the other traders about the homebuilders and construction stocks. They were mostly bullish, and viewed the recent pullback as a buying opportunity because of the strong housing market. I voiced my dislike of the stocks in the sector because of their high valuations. My thought was, if you are bullish on housing, then financials (particularly commercial and regional banks) are a much better value here for that story.
With that in mind, I plotted a comparison of XHB vs. XLF over the last 2 years. Granted, these ETFs are more broad-based than just homebuilders vs. banks, but the main theme still holds. Here is the 2 year chart of the XHB / XLF ratio:
So the ratio is at its lowest level since the summer of 2012. Many investors and traders have clearly noticed what we pointed out in the spring – homebuilders and construction-related names had become priced way too rich vs. their own historical valuations. Financials are priced much more reasonably. Moreover, the financial stalwarts, like WFC, USB, and PNC, are primarily U.S. focused commercial banks with plenty of exposure to a strong housing market, without many of the international risks of the investment banking names like JPM, C, BAC, GS, or MS. If you want exposure to U.S. housing, the banking stalwarts offer the best risk/reward in my view.
Meanwhile, I still don’t see homebuilders as reasonably priced after their recent fall. They still seem priced quite rich vs. their own valuation history. The recent rise in rates does not exactly help their outlook either. I expect them to continue to lag the broader market for the balance of 2013.