Home Builders ETF (ITB) Lags Behind S&P 500 Amidst Seasonal Slowdown

The S&P 500 has reached new all-time highs, while the iShares U.S. Home Construction ETF (ITB) remains in a bear market. This significant performance disparity highlights the end of the worst seasonal trade for home builders.

The S&P 500 has reached new all-time highs, while the iShares U.S. Home Construction ETF (ITB) remains mired in a bear market. This significant performance disparity highlights the end of the worst seasonal trade for home builders since the inception of the ITB ETF [2].

The seasonal trade on home builders typically involves a pattern where stocks outperform the S&P 500 from October or November through March or May, driven by bullish sentiment during the spring selling season. However, the 2024/2025 trading season has been one of the worst on record, with ITB underperforming the S&P 500 by 27.3% in May, the largest underperformance since the Great Financial Crisis [2].

The poor performance of ITB can be attributed to several factors. The housing market has been adversely affected by stubbornly high mortgage rates, which have been exacerbated by the bond market's unfavorable response to Fed rate cuts. Additionally, the housing market has been grappling with declining home prices and slowing sales, further weighing on ITB's performance [2].

However, there are signs of a potential turnaround. ITB has been rallying in recent weeks, breaking out above its first line of important resistance and consolidating prices. Mortgage rates have been trending downward, providing a floor under ITB's price and encouraging a breakout. ITB gained 4.1% in June and 8.5% in July, compared to the S&P 500's gains of 5.0% and 1.1% respectively [2].

The improving outlook for ITB has prompted Thomas Barwick to trade three home builders in addition to his core position in ITB. Taylor Morrison Home Corporation (TMHC) is the most bullish pick, with its stock trading above its 200-day moving average (DMA) and a potential challenge to its all-time high. Lennar Corporation (LEN) and Century Communities, Inc. (CCS) are also being considered, with LEN breaking out above a period of price consolidation and CCS recovering its loss from May earnings [2].

The performance disparity between the S&P 500 and ITB suggests that home builders may be poised for a reversal from bearish to bullish structure. However, risks remain, particularly with regard to interest rates and the bond market's response to additional Fed rate cuts. Despite these risks, the improving outlook for ITB and the housing market as a whole offers investors an opportunity to consider home builders as a potential investment [2].

References:
[1] https://site.financialmodelingprep.com/market-news/invesco-qqq-trust-series-1-etf-purchase-nasdaq-100-recovery
[2] https://seekingalpha.com/article/4800524-opportunities-following-the-end-of-the-worst-seasonal-trade-for-home-builders