Stock markets all over the world are parading to fresh highs. From Europe to Asia, the world’s major benchmarks sit at – or within a stone’s throw of – all-time or cycle highs.
Stateside, the Nasdaq 100 printed a new all-time high, and the S&P 500 followed a few days after.
Leadership groups are breaking out in unison. Down the risk curve, speculative growth is screaming and semis are back in the driver’s seat.
One bull flag after another keeps resolving higher.
And most importantly for today's note— the laggards keep catching up to the leaders.
But there’s one group that just hasn't shown up yet… and quite frankly, the bull market can’t rage on without them. I’m talking about a group of stocks SO important, they literally have to join the party. Otherwise, it throws a wrench in the entire bullish thesis.
It’s Homebuilders.
The “homies” are among the market’s most economically sensitive stocks – a real-time pulse check on domestic demand and credit conditions.
If this truly is an “everything rally,” it’s tough to believe homebuilders are on the verge of completing a major top.
And the evidence keeps pouring in to the contrary, as the intermarket action suggests these underperformers should play catch-up.
Industrials and Consumer Discretionary have already launched to new highs. Historically, homebuilders trade in lockstep with both – they’re classified as discretionary names, but they actually trade closer to the industrials sector.
Here’s XHB overlaid with each group, highlighting the gap that’s begging to close…
These groups have danced together all cycle, sometimes leading each other, and at other times lagging. That’s just how rotation works in bull markets.
And right now? Well I cant remember the last time where the homebuilders looked more primed for a catch-up trade.
And it's not just the builders. Adjacent stocks like mortgage providers and brokers are sitting flush against key levels of support, likewise threatening to fail massive tops.
For a broader view, here’s our custom Housing Complex Index:
Right now, this chart looks like the failed top pattern we’ve bet on time and time again this cycle. Why would this one be any different?
Homebuilders are interest rate-sensitive stocks— just like banks, speculative growth, and biotechs. Those are all working… so I think it’s just a matter of time until homies follow.
The bottom line is I want exposure to this theme. A lot of it.
So we constructed a universe looking at the entire complex, from building materials, to homebuilders, to furniture retailers, to mortgage providers, and everything in between.
Here’s what that leaderboard looks like:
And here’s how we plan to profit from this theme:
For broad exposure, we’re looking at the Homebuilders ETF $XHB:
Homebuilders tried to complete a nasty top earlier this year. However, the bears failed, and that damage is being repaired as we speak.
This zone also lines up with the 38.2% retracement from the 2022–2024 rally, adding to the confluence of interest here.
If XHB is above 100, the path of least resistance shifts higher, and we want to bet on a scoop ‘n score and rally back to the old highs near 126.
Here’s a comparison of homebuilders with their housing sector peers:
We think homies are about to follow the custom housing index and fail this top. They are the highest beta and highest-risk stocks in the housing complex. The ones that actually build the houses. None of these other businesses would need to exist without them.
In other words, homebuilders simply have to participate in a broad housing rally. It just doesn't work without them.
For our individual equity exposure, we will rely on the leaders as usual.
Here are some of our favorite setups in the space:
Our first setup is a $68B building products and equipment company. This is a global leader in smart building technologies, HVAC, fire and security solutions, and energy management platforms. Here’s Johnson Controls International $JCI:
JCI has gone vertical after breaking out of a massive base earlier this year, quickly reaching the 161.8% extension level.
A little digestion up here would be perfectly normal after a run like that—but there is a lot of strength underlying this uptrend, and we want to get behind it.
We’re buyers of a breakout in JCI above 104, targeting the next extension level at 140.
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