The November housing starts numbers are coming on Wednesday. The forecast is 864k. For October, the forecast was 840k but we got a 894k number, which was nice. I am hoping for a positive surprise again. In preparation for that, I am going to buy a bull spread on the iShares Dow Jones US Home Construction ETF (NYSEARCA:ITB). From the Seeking Alpha description of this ETF:
The iShares Dow Jones U.S. Home Construction Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Home Construction Index.
From the website of the issuer, top 10 holdings for ITB are a mix of homebuilders and home construction materials suppliers:
|Name||% of Fund|
|LENNAR CORP-A (NYSE:LEN)||9.76%|
|PULTEGROUP INC (NYSE:PHM)||9.55%|
|DR HORTON INC (NYSE:DHI)||8.35%|
|TOLL BROTHERS INC (NYSE:TOL)||7.62%|
|NVR INC (NYSE:NVR)||7.41%|
|HOME DEPOT INC (NYSE:HD)||4.74%|
|LOWE'S COS INC (NYSE:LOW)||4.24%|
|RYLAND GROUP INC/THE (NYSE:RYL)||4.12%|
|MDC HOLDINGS INC (NYSE:MDC)||3.55%|
|KB HOME (NYSE:KBH)||3.51%|
This is how ITB has reacted to the housing starts numbers this year.
As the chart shows, a positive read on housing starts routinely pushed up the ITB till that pattern stopped in September. Despite two very good numbers, the ETF has barely moved in the past 3 months. To me, this calls for a Bull spread on ITB.
So, here's my strategy. Buy 1 call for the January expiration for strike 20 (Ask $0.90), fund it partially by selling 1 call for the January expiration for strike 21 (Bid $0.35). Breakeven is $20.55. Max upside of $0.45 on investment of $0.55, if ITB ends above $21. I am hoping that housing starts are good and ITB makes a new high (current 52 week high is $21.33). I get more than a month to get there and one more housing starts report.
Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice. I am merely stating what I personally plan to do for my own portfolio.
Disclosure: I am long ITB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.