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Housing starts plunge doesn't mean sector is dead

Pras Subramanian

Chalk up another victim to the polar vortex. U.S. housing starts plunged 16% in January, most likely due to the frigid conditions blanketing most of the country, in particular the midwest. January's drop, the biggest in nearly three years, also marked a third month of declines for housing permits. 

Even with today's sobering news, strategist Ryan Detrick of Schaeffer’s Investment Research sees market sentiment as a strong reason to like the housing trade going forward, but in not the way you might think.

Back in 2012 when housing had a great year, Detrick notes in the attached video that traders were in fact placing bearish bets through ‘put’ options on the housing sector. Conversely, in 2013 when housing had a substandard year, many traders had heavily invested in ‘call’ options, or bullish bets on the housing. As Detrick sees it, the masses are usually wrong on these directional bets and typically it pays to be contrarian.

“What are we seeing in 2014? Those puts are coming back in. So it’s bearish activity,” Detrick points out, hearkening back to 2012 where investors were a bit cautions on the economy. Coupled with the fact that interest rates have actually come down since the Fed taper, and Detrick feels “housing could once again be an outperformer this year," despite recent headwinds. Detrick suggests the iShares U.S Home Construction ETF (ITB) as way to trade the housing sector.

Another way Detrick is playing housing is through the steel sector; think of it as something of an ancillary trade on construction. Steel names have had an absolutely miserable time in the years since the 2009 market lows, but have recently been recovering.

Once again Detrick notes that sentiment is another factor. Wall Street analysts covering the steel sector collectively have a 15% ‘sell’ rating, the highest percentage of any sector. The steel trade is looking like another contrarian play in the works, especially given the positive price action in the sector recently, Detrick says. Detrick’s top plays in steel are AK Steel (AKS), U.S. Steel (X) and the Market Vectors Steel ETF (SLX).