Over the last few days, the strongest sector is starting to lag. What sector is this? The Transports iShares Dow Jones Transport. Avg. (NYSEARCA:IYT). This sector has taken the markets higher and never looked back, until now. As the leader, the weakness starting to show up recently should be noted. It very likely speaks to weakness on the horizon for the whole market. Look at airline stocks like United Continental Holdings Inc (NYSE:UAL). The stock is down over 4.5% today alone. This is a monster drop and is seen in a majority of other airline stocks. The weakness in the transports is very much like the weakness that was seen in the Biotech Index just months ago prior to its 25% correction. This drop in the biotech index took the NASDAQ down almost 10%. If transports remain weak, use it as a leading indicator to signal a drop in the S&P 500 and the Dow Jones Industrial Average.
Traders and investors will look at many different leading stock indexes, and sectors for clues to what the economy will do. For example, there are many traders that will strictly follow the transportation sector as a leading indicator. After all, if the transportation stocks are rising that is a good sign that the economy is growing and expanding. Over the past 20 years there has really have not been a better leading indicator than the home-builder stock sector. This industry group has been one of the best tells for the economy and I believe that is still the case.
The leading home-builder stocks have been one of the best performing sectors since October 2011. In 2013, the home-builder stocks basically stalled out and traded sideways in a range for most of the year. This important stock sector remains very range bound even at this time. Traders must take note that if the home-builder stocks are unable to break out to new highs over the next couple of months it will be viewed as a sign of weakness and a breakdown in the sector is very likely.
Some of the leading home-builder stocks that traders should follow include Toll Brothers Inc (NYSE:TOL), Lennar Corp (NYSE:LEN), D.R. Horton Inc (NYSE:DHI), and KB Home (NYSE:KBH). Traders and investors that want to follow the entire sector can follow the iShares U.S. Home Construction ETF (NYSEARCA:ITB).
Currently, the ITB is trading around the $25.00 area. The ITB is now trading into very good weekly chart resistance. Should a pullback occur the ITB will have solid weekly chart support around the $21.00 level. Unfortunately for the stock market, any decline down to the $21.00 area on the ITB would signal some problems for the U.S. economy and most likely the stock market.
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