On Friday morning, the Street received news that pending home sales sank 11.6% in April. This metric from the National Association of Realtors measures the number of contracts signed to buy previously owned homes in the U.S. The April month-over-month reading of 81.9 fell from a downwardly revised reading of 92.6 in March.
On the surface, the April numbers do not auger well for the future of the housing market or for the future of exchange-traded funds (ETFs) pegged to stocks in the space. Yet judging by the recent move in these ETFs, the data could be signaling a bottom in the sector.
The biggest and most heavily traded homebuilder ETF is the SPDR S&P Homebuilders (NYSE: XHB). This ETF seeks to replicate the S&P Homebuilders Select Industry Index which includes such industry stalwarts as KB Home (NYSE: KB), PulteGroup (NYSE: PHM) and Lennar Corp. (NYSE: LEN). Top holdings in XHB also include housing-related products such as home goods retailers Aaron’s (NYSE: AAN), Pier 1 Imports (NYSE: PIR) and paint giant Sherwin-Williams (NYSE: SHW).
Interestingly, the price of XHB has risen nicely in front of the pending home sales report, and over the past five trading sessions XHB has jumped about 2.4%. For the month, however, the shares have given back about 2.5% of their value. The schizophrenic trade in XHB has many wondering which way this sector is headed going forward. Is there no light at the end of the tunnel for housing stocks, or does today’s number represent a low-risk buying opportunity in the space?
If you’re an options player in the bear camp, and you think housing and homebuilder stocks are headed south, then check out the XHB Jul 2011 18 Put. Bullish options players who suspect that today’s news represents a good entry point in the sector should look at the XHB Jul 2011 19 Call.
Another way to play the housing news is via the iShares Dow Jones U.S. Home Construction (NYSE: ITB). This ETF began trading higher earlier this week after Tuesday’s news that the Commerce Department estimated new home sales had climbed about 7% in April. This metric is good for stocks in the construction sector, and that’s precisely what you get when you own ITB.
Top holdings in this fund include NVR, Inc. (NYSE: NVR), D.R. Horton (NYSE: DHI) and Toll Brothers (NYSE: TOL). ITB holds only construction companies, unlike XHB, and as such it represents much more of a pure play in the space. Over the past five trading sessions, ITB has jumped 3.4%. During the past month, however, the shares are down 2.5%.
Here again, options players have two ways to bet on the sector. Bears should check out the ITB July 2011 13 Put, while bullish players who suspect this week’s gains will continue can look to the ITB July 2011 14 Call.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.
