There has been little doubt that home improvement retailers like The Home Depot (HD) and Lowe’s (LOW) have been massive outliers for the last few years in what has been a very difficult retail environment here in the U.S. HD has more than tripled the performance of the S&P 500 (SPX) up about 675% from the financial crisis lows in early 2008. Today, HD made a new all time high before reversing:
On Friday morning the Commerce Department reported February Construction spending, per Reuters:
U.S. construction spending fell in February by the largest amount in three months. Weakness in nonresidential construction and government offset the strongest month for home construction in more than eight years.
Construction spending fell 0.5 percent in February following a 2.1 percent January gain, the Commerce Department reported Friday. Spending declines on construction of factories, communication facilities and other nonresidential activities fell by 1.3 percent in February. Sending on government projects was down 1.7 percent.
Those declines overshadowed a solid 0.9 percent rise in home construction, which pushed that sector to the highest point since October 2007.
Home construction has been a bright spot for the economy, growing at a sizzling 10.1 percent rate in the fourth quarter. Analysts are forecasting housing will remain strong this year.
So home construction is ripping while the public sector is slow. Rather than piling in to homebuilders and retailers it may make sense to consider the poor March U.S. Auto sales data also released Friday, that could be a leading indicator for homes sales as all three U.S. automakers missed sales in March, causing many to reiterate their calls for peak auto sales in 2015.
All this got me to look at homebuilder etfs like ITB (iShares U.S. Home Construction) and the XHB (S&P Homebuilders). There are some big differences between these two trading vehicles. For instance, ITB is primarily made up of builders with DHI, LEN, NVR, PHM and TOL making up nearly 45% of the weight, with a retailer like HD making up only 4.3%. With the XHB, retailers like WHR, RH, LOW & HD are in the top 6 holdings and make up about 20% of the weight. ITB a better pure play on the actual builders opposed to stuff that go into homes, but the options are fairly illiquid, so I will use XHB for this trade idea.
On a one year basis the XHB was just rejected at technical resistance at $34:
More importantly, that resistance is very near the long term uptrend that has been in place since the 2011 lows:
If you are of the mindset that weak autos sales in March could be a leading indicator of softer housing data around the corner and that the XHB’s 23% bounce off of its February lows incorporates any and all good news in the near term, then these levels could make for a good short entry.
So whats the trade?
With $34 looking like fairly staunch technical resistance I want to lean on that level a bit for my trade.
*Trade: XHB ($33.70) Buy June 34/ 30 put spread for $1
- Buy to open 1 June 34 put for 1.25
- Sell 1 to open 1 June 30 put at .25
Break-Even on June Expiration:
Profits: between 33 and 30 of up to 3, max gain of 3 at 30 or below.
Losses: up to 1 between 33 and 34 with max loss of 1 above 34
Rationale: The break-even of this trade is down about 2% which makes risking 3% (that is in the money) fairly attractive. Options prices are also fairly attractive, with 30 day at the money implied volatility at 18% very near the levels from last summer before it doubled, and below the one year average of 20%:
[caption id="attachment_62578" align="aligncenter" width="600"]
From Bloomberg[/caption]