As longtime readers of this report are aware, there is an unofficial market indicator known as the Super Bowl Indicator, first introduced in 1978 by Leonard Koppett, a sportswriter for The New York Times. The indicator suggests that if a team from the American Football Conference (AFC) wins, then there is a gloomy outlook for the stock market, defined by the S&P 500 Index (SPX) for the rest of the year. Conversely, if a team that was in the NFL before the NFL/AFL merger OR a team from the National Football Conference (NFC) wins, it will be a positive year for the market.

On Sunday, the Kansas City Chiefs will represent the AFC for the third time in the past four years and the Philadelphia Eagles will represent the NFC for the first time since 2018. After the Eagles won that Super Bowl in 2018, the SPX ended the year with an annual decline of -6.24%, marking a false reading from the Super Bowl Indicator. The Chief’s last victory in 2020 also proved to be a false indicator, as the S&P 500 ended that year up over 16%. Over the last 20 years, this ‘Indicator’ has seen an equal split between right and wrong indications, with the last correct “signal” occurring with the Buccaneers’ win in 2021. However, going back to Super Bowl I, it has been correct about 70% of the time. Pure coincidence? Almost certainly. But if you don't have an allegiance with either team playing Sunday, you may want to cheer for the Eagles to take home the Lombardi trophy in hopes this will lead to positive domestic equity returns throughout the rest of the year.

One year ago, almost to the day, we were talking about the technical weakness from homebuilder stocks. That downtrend worsened as it continued for most of 2022; however, in November we began to see constructive moves from Homebuilders and that technical strength remains intact today.

Below is a Point & Figure chart of the SPDR S&P Homebuilders ETF (XHB). For background, “the fund seeks to provide exposure to the homebuilders segment of the S&P TMI, comprising the Homebuilding sub-industry, and may include exposure to the Building Products, Home Furnishings, Home Improvement Retail, Home Furnishing Retail, and Household Appliances sub-industries” (ssga.com). As previously mentioned, the recent technical strength is notable given a string of five consecutive Point & Figure buy signals and a fund score of 4.33. Additionally, note that XHB recently rallied above its August 2022 chart high at $68, a material point of resistance, and has since pulled back (earlier this week) to that prior area of resistance.

There is little to say negative about this chart, but if we were to nitpick, the recent pullback came after a test of the March 2022 high at $72. Like with other charts, the March 2022 highs are another notable area of resistance and market memory. Furthermore, even if XHB was able to break through its March highs at $72, it would still sit roughly 20% away from its all-time chart highs from December 2021 at $86.

Before moving forward with the technical talk and some long ideas, it’s worth stepping back to consider what could be catalyzing this rally. After all, a 14% year-to-date gain (through 2/9) and a nearly 20% run since the end of October 2022 does not happen without some type of rationale.

Admittedly, there are a variety of potential tailwinds, but the most prominent is likely the recent decline in interest rates - more specifically, the softening in mortgage rates. In short, cheaper debt/financing options make purchasing a home more affordable for more people, which in turn helps builders sell more homes. The line chart below plots the average 30YR Fixed Rate Mortgage in the United States, and as called out, in November 2022 rates peaked which is about when homebuilder stocks put in their latest bottom.

However, notice that since last Friday’s (2/3) huge nonfarm payroll beat (517k vs 185k consensus) homebuilder stocks have slid…not enough to give Point & Figure sell signals or break trend, but enough to expose their current sensitivity to potential changes in interest rates. The connection here is that a persistently strong labor market gives the Fed more leash to keep hiking rates. From 2/3 – 2/9, XHB is down 3.22% while the S&P 500 has lost just 1.28%.

On November 17, 2022, Freddie Mac changed the methodology of the Primary Mortgage Market Survey® (PMMS®). The weekly mortgage rate is now based on applications submitted to Freddie Mac from lenders across the country. The takeaway here is the same, as confirmable in recent treasury yield movement, but this adjustment should be noted. For more information regarding Freddie Mac’s enhancement, see their research note.

It is important to distinguish homebuilder stocks from real estate stocks, especially in today’s discussion, because the two spaces can easily overlap mentally when talking about macro tailwinds like interest rates. However, when looking beneath the hood of sector funds it becomes a bit easier to make separation. For example, the holdings of the Real Estate Select Sector SPDR Fund (XLRE) are predominantly REITs (Real Estate Investment Trusts) while those underlying the SPDR Homebuilders ETF (XHB) tend to lean and act more consumer discretionary. Two explicit examples are Home Depot (HD) and Lowe’s (LOW), each of which are holdings in XHB.

At a fund level, with a score north of 4.0 XHB looks like the better investment right now compared to XLRE’s fund score of 1.09, despite the recent breakout into a positive trend. Within XHB, there are plenty of stocks to pick from if wanting individual exposure. In fact, over 90% trade on Point & Figure buy signals and 96% trade in a positive trend. A couple of our favorites are highlighted below, each reversing large downtrends from 2022.

Builders FirstSource (BLDR), a manufacturer and supplier of building materials, has been a high attribute stock (rated as a 3 or better) consistently since April 2020 - since November 10th of 2022 it has been rated a perfect 5 for 5’er. Action in January/early February ran the stock within a few percent of its all-time chart high at $86, but BLDR recently pulled back out of overbought territory towards its March 2022 highs in the upper $70 range. Due to the exhale, those interested in taking long exposure may begin doing so here. Additional positions could be established with a reversal up into Xs, which would create a higher level of support. Note earnings are expected on 2/28.

D.R. Horton (DHI) is another positive standout with a 4 for 5 technical attribute rating. Recent market action also led this name to within several percent of its all-time chart high first reached in December 2021. DHI pulled back into Os earlier this week which creates a more actionable entry point for those seeking fresh exposure.

Portfolio View - Major Market ETFs

Additional Comments:

The SPDR Dow Jones Industrial Average ETF Trust DIA remains unchanged this week, sitting in a column of O’s at a price of $330. The fund has a current score of 2.66 with a negative score direction of -0.66, and it now scores below the average US score of 3.26. DIA remains in a positive trend at current levels. Support is offered at $290 on the default chart, the September 2022 chart low, with overhead resistance at $345.

The iShares MSCI Emerging Markets ETF EEM remains in a column of Os this week and is sitting at a price of $40. EEM is trading on three consecutive buy signals and in a positive trend to start the year. Support is now seen at a price of $38.00, the December lows.

The iShares MSCI EAFE ETF EFA sits in a column of X’s this week at an unchanged price of $72.00. The fund remains in a positive trend at current levels and now sits at more actionable territory with a weekly OBOS reading of 56%. The fund now showcases a strong 4.30 fund score, outpacing the average non-US score of 3.21. Support is offered at $55 on the default chart.

The iShares MSCI Frontier and Select EM ETF FM reversed down into a column of O’s this week, its first chart action since mid-January. The fund has a weak score of 1.84 but is paired with a positive 0.40 score direction. FM is now seen at a price of $25.50. Support is seen below at $23.50, lows for 2022.

The iShares S&P MidCap 400 Index Fund IJH remains in a column of X’s this week, trading on a buy signal and in a positive trend. The fund has a current fund score of 4.36, above the average US score of 3.26. Support can be found at $240 on the default chart, the December 2022 lows.

The iShares S&P SmallCap 600 Index Fund IJR rests in a column of X’s and sits at an unchanged price of $108. The fund showcases an acceptable 3.32 fund score after breaking a string of 2 consecutive sell signals and breaking back into a positive trend with recent action. Support is offered at $98 on the default trend chart with overhead resistance at $110, the March 2022 highs.

The Invesco QQQ Trust QQQ remains in a column of X’s this week, sitting at a price of $310. QQQ moved to a positive trend earlier this month but still has an unacceptable fund score of 2.68. The current fund score is lower than the average US fund (3.26), and the fund holds a now positive 1.39 score direction. Initial support is offered at $260.

The Invesco S&P 500 Equal Weight ETF RSP remains in a column of X’s this week, sitting at a price of $154, having returned to a buy signal at breaking a triple top at $152 earlier this month. RSP holds a positive 1.48 score direction and has a fund score of 5.31. This beats the average S&P 500 Index fund score of 3.59 and remains the highest score of the funds in this report. Support is seen at $140 on the default chart.

The SPDR S&P 500 ETF Trust SPY remains in a column of X’s this week, the fund recently returned to a buy signal after breaking a triple top at $415. The fund has a 2.70 score posting which is below the average S&P 500 Index fund score of 3.59. Support is seen at $375 on the default chart, December 2022 lows.

The Invesco S&P 500 Top 50 ETF XLG remains on a string of two consecutive buy signals this week, sitting at a price of $305. XLG now has a 2.52 fund score with a now positive score direction of 0.92. XLG still scores below the average US Fund (3.26). Support is seen at $275 on the default chart.

Daily Option Ideas for February 10, 2023