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Two Ways to Play Homebuilders
By Blake Young |
Homebuilders rallied 40% off their annual lows. |
Everyone celebrated the bounce. |
The Fed cut rates in September, and housing stocks took off. |
But something broke in the past week… |
The ITB ETF tested resistance at $117 twice and failed both times. |
The uptrend line that held for months snapped. Treasury yields refused to drop despite the Fed's dovish stance. |
This tells us the bond market never showed up. |
Without real demand pushing rates lower, the housing rally just ran out of road. |
The technical damage is now clear across homebuilders and mortgage lenders. The sector that led the recovery may lead the next leg down. |
And it's ripe with opportunity. |
Here's what the charts are telling us and how to position for the decline. |
The ITB Breakdown |
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The ITB tested the 117 level twice in recent weeks. |
The first test came during the December gap fill. The second arrived just days ago. Former support now acts as resistance. |
The sector rallied 40% off annual lows while Treasury yields held firm despite the Fed's rate cut. That combination reveals a critical truth: bond market demand never materialized enough to push rates lower. |
New home construction depends on affordable financing. Without it, the 40% rally may have exhausted itself. |
The ITB broke its uptrend line and formed a widening pattern. Technical traders recognize this formation as a reversal signal. The chart structure has shifted from bullish momentum to distribution. |
The Better Trade: TOL Brothers |
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TOL Brothers (TOL) offers a cleaner setup than the broad ETF. |
The gap retest is more defined. The support level rejection is sharper. |
The last five days formed what appears to be a large bear flag. |
The trade mechanics favor shorts here. |
TOL is Easy to Borrow. Implied Volatility sits at just 12%, making long puts exceptionally cheap. |
A break below the recent two-day low triggers an 11% move to the downside based on technical measurements. |
The Mortgage Connection |
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Rocket Companies (RKT) presents a related opportunity. |
The stock rallied to recent highs before breaking trend and gapping down. The connection to homebuilders runs through the lending channel. |
Consumer credit defaults are climbing. Lenders typically respond by tightening standards. Fewer approved loans means less volume for Rocket. |
The company already operates at a negative net profit margin. They lose money on each loan they write. |
RKT is Hard to Borrow, ruling out stock shorts. The options market offers a better path. |
Implied Volatility rank sits at 40%. That elevated premium level makes selling call verticals the optimal strategy rather than buying puts. |
The housing sector is sending signals across multiple securities. Homebuilders broke trend after filling gaps. Mortgage lenders gapped down from recent highs. Bond yields refused to cooperate with the Fed's rate cut. |
These pieces fit together into a bearish thesis for housing-related names. |
Final Thoughts |
The housing sector has delivered a textbook example of a failed rally. |
Multiple signals converged at the same time. Technical breakdowns across ITB and individual names. |
Deteriorating fundamentals in the lending channel. A bond market that refused to cooperate with the Fed's narrative. |
TOL Brothers offers the cleanest entry with defined risk parameters. |
RKT provides exposure to the lending side with favorable options premium. Both trades work independently. Together they capture the full housing weakness from construction through financing. |
The 40% rally created complacency. The recent breakdown is waking traders up. |
Position accordingly before the move accelerates. |
Blake Young
Senior Market Strategist, TheoTRADE |
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