On Friday, we looked at why home prices are such an important part of the economy. And, how that in turn can drive stock prices.

Today, I want to continue with the property theme by looking at home construction.

Home construction has a multiplier effect across the economy just like rising home prices.

When demand for new housing is soaring, it flows right up through the supply chain. Not only in the demand for building materials, but the associated labor required at each stage of the building process.

But that’s not the only similarity. Both segments are extremely sensitive to the interest rate cycle.

So, with mortgage rates rising rapidly this year, the iShares U.S. Home Construction ETF (ITB) has come under enormous pressure.

As you can see in the chart of ITB below, it fell along with the rest of the market at the start of 2022.

However, while the market enjoyed the relief rally over the past few weeks, ITB didn’t. Instead, it kept heading down…

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

When we last checked in on ITB in February (red arrow), we saw how ITB had gone into a bear pattern…

After forming a double-top (A and B), declining momentum – as shown by lower highs in the Relative Strength Index (RSI) – caused ITB’s share price to fall.

The steep angle that the 10-day moving average (MA – red line) crossed down over the 50-day MA (blue line) shows the severity of that drop.

Then, with the RSI falling through support (green line), ITB was fighting to hold a key support level (orange line) that had held since June last year.

We know that the longer a support level holds, the stronger that level becomes. And, how important it is if that support level fails.

Well, that’s exactly what’s played out since February…

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

With the RSI stuck in the lower half of its band, ITB fell through that long-term support. After failing to break higher twice, ITB’s subsequent rallies have fizzled out when the RSI couldn’t break above the green line and stay there.

With the MAs having converged (though not crossed) over the past month and a half, the 10-day MA now looks to be breaking further (and lower) away from the 50-day MA. That’s further evidence of its bearish sentiment.

However, even after falling almost 30% from its December high, ITB is still trading at almost triple the price of its March 2020 low.

So, what can we expect from here?

Clearly, ITB is in a downtrend. But that doesn’t mean we won’t get the chance to trade it in both directions.

We can see from the chart that when the RSI has formed a ‘V’ in oversold territory (below the lower grey line) – like most recently in January and February – that ITB had a quick and sharp bounce…

If such a scenario should repeat, that could throw up the opportunity for a quick long trade.

But until the RSI can break back into the upper half of its band – which seems less likely as interest rates continue to rise – then the prevailing trend will remain down.

Meaning that while we might see some short, sharp rallies (and trade off of them), we need to be ready to sell into any strength.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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