While semiconductors and high-flying tech darlings have been dazzling spectators with meteoric gains, homebuilding stocks have quietly broken out to a record.
Indeed, the steady rise from homebuilders has the industry ETF up 41% on the year. Compared to the S&P 500’s 2021 gain of 25%, we’re talking about some serious outperformance.
The recent push to new highs has me eyeing construction-related companies for attractive trade ideas. After scanning through about a dozen of the top homebuilding stocks, I’ve narrowed it down to the following three:
Their price charts boast uptrends with increasing momentum. So let’s take a closer look and map out how to profit from the continued strength.
Homebuilding Stocks: S&P Homebuilders ETF (XHB)
I’m a sucker for exchange-traded funds when it comes to capitalizing on a theme. If you think homebuilding stocks are set for higher prices, then why not just buy a basket of all of them? It offers the benefits of diversification while dodging the excessive volatility of earnings announcements.
Since peaking last May, XHB spent six months building a sideways base. The consolidation allowed the fund to work through overbought conditions and digest the significant gains had over the previous year.
After multiple attempts to push above $80, this month’s breakout bid finally succeeded. With that, the stage is set for a nice ramp into year-end. Seasonal winds are blowing in the right direction and should help the follow-through efforts.
The lower volatility nature of XHB makes it a great candidate for call diagonal spreads.
The Trade: Buy the January $75 call while selling the December $83 call for $6.05.
D.R. Horton (DHI)
DR Horton’s performance after Tuesday’s earnings report made it an easy choice for the first individual homebuilder to mention. DHI stock jumped 5.2% on heavy volume yesterday.
The gains were had, mind you, while the rest of the market suffered its largest down day in weeks. Prices are rising above all major moving averages and fast approaching the next primary resistance zone near $100.
If DHI follows in the footsteps of its industry ETF, we will break through the ceiling in short order. Once $100 gets taken out, we have open-air until $105. So, consider that the ultimate target. Bull call spreads offer a low-cost way to play.
The Trade: Buy the January $100/$105 call vertical for $1.75.
You’re risking $1.75 to make $3.25 if DHI stock can rise above $105 by expiration.
Homebuilding Stocks: Lennar (LEN)
Lennar rounds out today’s hat trick of homebuilding stocks with a chart that mirrors XHB.
The past week of strength has made an otherwise forgettable chart interesting. With the gain, LEN stock is now testing the upper end of its six-month range. Breaking out of long-term bases is an extremely bullish omen.
I’m fond of the charting phrase “the longer the base, the higher in space,” and have seen the truth of it play out time and time again.
With LEN stock up almost six days in a row, it may need to pause before taking out $110. So you can either enter now in anticipation of an eventual break or wait for additional confirmation.
In either case, I once again prefer bull call spreads.
The Trade: Buy the January $110/$115 call vertical for $1.85
The risk is $1.85, and the reward is $3.15. LEN needs to rise above $115 by expiration to capture the entire profit.
On the date of publication, Tyler Craig was LONG TSLA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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