The Seasonal Trade On Home Builders Is Off to Its Worst Start Since 2009

(This is an excerpt from an article I originally published on Seeking Alpha on March 28, 2016. Click here to read the entire piece.)

Last December, I wrote about the shaky prospects for the seasonal trade on home builders. Sure enough, iShares US Home Construction (ITB) has not performed this badly on an absolute or relative basis, as measured from the end of October, since 2009.


The 2016 seasonal trade for iShares US Home Construction (ITB) is off to a poor start.
The 2016 seasonal trade for iShares US Home Construction (ITB) is off to a poor start.

Source for price: Yahoo Finance

When I wrote about the shaky prospects for this trade, I pointed to likely headwinds from the market’s expectations on rate hikes from the U.S. Federal Reserve. Those rate expectations have swung wildly in 2016 from a market that pushed out the next rate hike to 2017 to the current market that just pushed the first rate hike back to July, 2016.


Across most of 2016, expectations for the next rate hike are slowly returning to levels last seen right before the Fed announced its latest policy on March 16th.
Across most of 2016, expectations for the next rate hike are slowly returning to levels last seen right before the Fed announced its latest policy on March 16th.

Source: CME Group FedWatch

Given these changes, I cannot blame ITB’s problems on interest rates per se. Indeed, ITB, along with the S&P 500 (SPY) has rallied along with expectations for an earlier and earlier date for the next rate hike.


Resistance held firm on ITB this past week at its 200-day moving average (DMA).
Resistance held firm on ITB this past week at its 200-day moving average (DMA).

Source: FreeStockCharts.com

If the market can rally along with increasing rate expectations, I have to assume economic expectations are at work. {snip}


After several years of cooling off, recession fears suddenly turned upward in early 2016.
After several years of cooling off, recession fears suddenly turned upward in early 2016.

The recent peak in recession fears came in mid-February as the stock market printed its last bottom in price level.
The recent peak in recession fears came in mid-February as the stock market printed its last bottom in price level.

Source: Google Trends

{snip}

Anyway, a more directly quantitative view of recession fears… {snip}


The recent odds of a recession have "soared" to levels not seen from 2010 to now.
The recent odds of a recession have “soared” to levels not seen from 2010 to now.

However, the odds of a recession are far smaller than recent episodes leading into or during what in retrospect was officially called a recession.
However, the odds of a recession are far smaller than recent episodes leading into or during what in retrospect was officially called a recession.

Source: Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, March 27, 2016.

While the data points for the first months of 2016 are not yet available, I think it is safe to say that the market exhibited extreme sensitivity to the increase of recession odds from near zero. {snip}

Be careful out there!

Full disclosure: long ITB call options

(This is an excerpt from an article I originally published on Seeking Alpha on March 28, 2016. Click here to read the entire piece.)

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