Compression Trade ETF: XHB Home Builders vs ETF: JJC COPPER
Homebuilders Most Confident In Over 7 Years
Not only did all three segments of the NAHB’s index rise but the headline print saw its largest month-over-month increase since 1996. Despite falling mortgage applications, an REO-to-rent model that is disintegrating amid higher rates (which notably saw no mention in the text of the NAHB’s PR), and slumping Lumber prices, the homebuilders (and sellers) remain self-confirmingly exuberant at the outlook for their industry as the index hits 52 – its highest since March 2006 – surging to its best 2-year gain in the almost 30 years of recorded data.
Pivotal Trades feels that with the recent rise in interest rates, the recent fall in mortgage applications coupled with the failure of two of the most important building materials to keep pace that the normal correlation is about to reassert itself and the recent divergence will be mitigated. For these reasons we are recommending the following compression trade:
JJC vs XHB: Selling Short XHB $29.47 Going Long JJC $37.14