I am starting to see potential signs of a turn in the U.S. dollar. Nothing has been triggered yet, but it's worth watching now. A turn higher would put a damper on this rally that has been going since mid-February. Action in equities the last few days appears to be consolidation and not quite actionable, as I don't see a short-term trigger to be long or short right right now. But if the dip this morning can continue through tomorrow and the dollar arises from its slumber, then maybe we will have something. For now, though, I would just keep an eye on the Buck.
One sector that is working this morning is homebuilders. In fact, they have been working for a while now and appear to be set up to outperform should equities continue moving sideways or higher. Usually my first move would be in something such as the iShares US Home Construction (ITB); however, I don't like the ETF's top-10 holdings when examining them chart by chart.
I went through the top residential construction names and my five favorite charts (in order) were: Meritage Homes (MTH), Taylor Morrison Home (TMHC), KB Home (KBH), Stocks Under $10 holding CalAtlantic Group (CAA) and M.D.C. Holdings (MCD). Unfortunately, when you look at ITB, its top-five holdings are D.R. Horton (DHI), Lennar (LEN), NVR (NVR), PulteGroup (PHM) and Toll Brothers (TOL). We even get Home Depot (HD) thrown in there before finally getting to CalAtlantic.
When examining MTH and TMHC on the daily setup, we find that price action is currently lacking on the other top names in ITB. Both MTH and TMHC have broken out higher from consolidation patterns. I prefer the ascending triangle of TMHC; however, the current day candle pattern is a bit better on MTH as it has not faded quite as far as TMHC. Still, if I only have to pick one, I would go with TMHC due to the fact there is still room to run higher with the Full Stochastics. Compared to the remainder of the group, there is nothing wrong with either name.
If I were going to approach the homebuilders, I would either build my own basket, using those top-five names or set up a long/short pairing. I would consider using longs like MTH, TMHC and one of the other top-five and shorting ITB against it. That short could come in the form of shorting ITB or one could buy ITB puts or even short ITB calls, holding those long individual names as an offset.
This is my preferred approach: Look to short two ITB May 27 calls for each 75 shares long MTH and 200 shares long TMHC. This will still leave an individual net long the position, but also provide some hedge. One could even use the net premium from the ITB short calls to buy puts against the long stock if you so choose.
It still feels a little weak here, so I am going to let the morning play out before buying anything more than a starter position in TMHC.