This Sector ETF is Beating the S&P By a Long Shot

August 29, 2019  |  Michael Reilly

Neither trade wars, inverted yield curves, nor Fed policy concerns could stop this sector ETF from gaining more than 2 times the S&P 500 this year…

What a month!  It has been just over a month since the S&P 500 (SPX) hit a closing high just shy of 3020 on July 24th, and while the SPX is down just 6% since, there has been quite a lot of volatility in the meantime, both up and down.  

So, if a “simple” 6% pullback has felt worse than that, it’s because it has been a roller coaster ride to get there.

Since the recent market peak, SPX has moved more than 1% (up or down) in 11 of the 24 trading days, or 46% of the days over the past month.

(Click any image to enlarge)

And it’s possible, if not likely, the rollercoaster ride will continue as long as we get mixed signals out of Washington and Beijing regarding trade negotiations. 

But, in spite of the now daily volatility in the broader market, there are still a few sectors bucking the trend and enjoying strong gains vs. the broader market.

Relative strength and technical analysis are adept at seeking out those areas of the market that are experiencing market outperformance, while also exposing markets or sectors that are experiencing weakness.

One of the real bright spots during the most recent volatility and throughout 2019 can be found in the home builders.

Specially, the iShares U.S. Home Construction ETF (ITB).

As noted above, we’re all too aware of the turbulent ride investors have experienced recently and it’s been enough to cause some to feel nauseous and turn green.

But ITB, and many other home builders, have been a happy place for investors….

During the previous 30 days, while SPX has given up -3.25%, ITB has gained +5.87%, leading to a 9.12% dispersion in returns!  This is exactly the kind of dispersion we look for – strength in the face of market weakness.

The picture remains similar as we zoom out and look at the previous 60 day comparison, ITB has gained +6.22%, while SPX has lost 1.43%.

As the saying goes, “when in doubt, zoom out”. So, if there is any question if ITB is just a short term aberration, take a look at the 2019 year to date chart of ITB vs. SPX.

While SPX is a solid 16.92% through August 29th (as of this writing) – ITB, the iShares U.S. Home Construction ETF has more than doubled the return of SPX with a gain of 36.32%.

And while a diversified sector ETF like ITB offers investors exposure to the sector without individual company risk, some investors choose to be very selective and prefer individual stocks to ETFs.

Here are just a few names that rank very highly using our technical analytics, making them technically sound investment choices for those who would like to look further into them.

Names like, D.R. Horton, Inc. (DHI), Meritage Homes Corporation (MTH), Pulte Group, Inc (PHM) and KB Homes (KBH).

And, as you can see from the chart below, these names are absolutely smoking the market this year.

But don’t make the mistake average investors make when seeing eye popping returns like these… that it’s over. That all the gains to be had, have been had. Relative strength is all about finding long term trends and riding them until the trend reverses.

And right now, based on the technicals, these home construction stocks are still in play.

So, even when markets look scary, there’s often a bull market somewhere – the trick is knowing how to find it.

This is also exactly the kind of market data we look at when re-balancing our clients’ portfolios here at Rowe Wealth. If you already hold a portfolio valued at least $500,000 you’re eligible for a completely free evaluation from one of our advisors. We can quickly analyze your holdings to see if the technical data shows strength or weakness in your portfolio, as well as estimate the amount of money you’re likely to gain or lose over the next six months.

Click here now to see available appointment times.

As always, invest wisely.

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