While the broader market remained flat Monday, there were significant pockets of weakness in important groups of stocks. One such pocket was the homebuilder stocks, led lower by Beazer Homes (NYSE:BZH) after the company announced its fiscal fourth-quarter earnings.
The majority of homebuilder stocks, however, don’t look nearly as weak as the chart of BZH.
Attentive traders and investors noted weakness creeping into Beazer’s stock price as early as September. While most homebuilders either moved higher or sideways during September and October, BZH never recovered from its recent high on Sept. 21 and subsequently started diverging from the rest of the pack. This negative divergence should have been a warning sign to Beazer investors going into yesterday’s quarterly earnings report.
The chart below compares Beazer Homes to some of its closest competitors. BZH is the white line, and its negative divergence versus the competitors is marked with the downward sloping red arrow.
In my opinion, the best ETF to track overall performance of U.S. homebuilding stocks is the iShares Dow Jones US Home Construction Index Fund (NYSE:ITB). This ETF sports a 63.5% allocation to homebuilder stocks and, with a 15-day average volume of 3.8 million shares, also offers plenty of liquidity.
As a side note, the popular SPDR S&P Homebuilders ETF (NYSE:XHB), which many investors seem to use as a proxy to homebuilder stocks, only has an allocation of 26.73% to that actual industry — hence, in my view, it’s not a great way to tackle the homebuilders.
Looking at a chart of the ITB reveals that the very defined uptrend, which started a little more than one year ago, remains very much intact.
Nothing is yet broken from a trend perspective, although some more downside or around 3% to 5% is very possible. The relative strength index is showing negative divergence, indicating the index is due for consolidation. For now, however, there are no signs that homebuilder charts as a group will entirely break, as is the case with Beazer.
Bottom line: Both in relative and absolute terms, homebuilders as a group — measured by the ITB — are holding up well. The broken chart of Beazer is an exception and not the rule.