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Monday, May 13, 2013

XHB vs lumber

The home building stocks have been doing very well since late 2011.  Since home building uses a lot of lumber it makes sense that there might be some connection between the price of lumber and XHB (home builder ETF).  Lets look at some charts.  XHB is the solid black line.

This first chart covers XHB's inception in 2006.  Although correlation is not perfect they did trend together pretty well.  Lets move forward in time.

Since the low in 2009 they trended up together.  They have diverged from time to time, but they always eventually seem to get back together.  Now lets look at the current chart.

What is going on at the end of this chart?  XHB is flying up and lumber is falling down hard.  This relationship is somewhat complicated.  There are more instances of lumber leading XHB up and down then XHB leading.  However, there are times when it is the opposite.  In July of 2009 XHB flew up, but lumber did not bottom and go up until Oct.  We clearly have a sizable divergence over the last few weeks.  Which is right?  Will XHB fall or will lumber bottom and turn up?  Unfortunately I don't know the answer to that question.  We can see that lumber tumbled in the spring of 2011 very similar to now.  XHB eventually took quite a tumble later in the year.  There was no big slump in lumber last spring.  Nor was there a slump in XHB of any size.  I don't know if home builders are going to top and correct in the months ahead or not.  However, that is clearly a possibility.  If you are in this sector I suggest you monitor your positions closely.


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