Overview: For the first time in its history, CFR is going short! This week’s pick, or rather reject, is the iShares U.S. Home Construction ETF. Ticker ITB, this ETF tracks home construction in the US and the residential building sector. The fund is made up of 47 companies, the majority being major homebuilders and building product suppliers. Companies in the fund include DR Horton, the PulteGroup, and Lennar Corp. It also holds non-builder suppliers like Sherwin-Williams Co, Home Depot, and Lowes.
Thesis: The thesis for this week’s pick is the recent slump in the housing market index. The NAHB/Wells Fargo Housing Housing market index now sits at a 14 year low of 29 points. Also known as the HMI, the index is intended to track the confidence of single family home builders in the housing market. Based on three main conditions (present sales of new single-family homes, expected single-family home sales within the next six months, and traffic of prospective buyers of new single family homes), it’s a monthly survey that scales confidence from 0 to 100. With the current level of 29 points, home builders are less than optimistic on the current and near-term housing market. That’s where this week’s short comes in.
Short Setup: Our proposed entry sits at the ETF’s current market price of $84.94 (as of close 10/19). With a stop loss of $90 and price target of $74, our position takes on 6% of risk and 12.9% reward at a 2.2:1 risk to reward ratio. There are a few important things to note about this trade. One of the biggest risks is D.R. Horton, who reports on the morning of October 29th. With it being one of the largest holdings in the fund, a beat of either top or bottom line could possibly drive ITB enough to hit our stop loss at $90. However, based on our current thesis and market sentiment, we do not see D.R. Horton’s earnings impact this position. Another risk of the trade to note is the proximity to the fund’s 52-week low of $82.08 which could squeeze out our position. The last thing we want to do is to catch a dead cat bounce, but ITB is down roughly 4% in the last month and with heated inflation and falling HMI, we believe it will keep falling. To end the trade, we are going to plan on a December 10th exit, following the Fed’s rate decision for the month on December 9th (rate hike odds sit at about 90%) to let the markets reaction settle. We will also trail our stop at about 5% above the lowest close to maximize profit.
Short: ITB @ $84.94 entry, target $74 (+12.9%), stop $90 (-6.0%)
