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Another ETF Candidate for a Short-Covering Rally


The recent batch of U.S. economic data points have been soft (blame it on the weather, so the refrain goes), prompting some mixed housing numbers.

In January, housing starts fell 16% while building permits dropped 5.4%. On the other hand, backlogs remain solid and on Wednesday, the CoreLogic home price report said prices rose 12% year-over-year in January.

Over the past month, the $1.8 billion iShares U.S. Home Construction ETF (ITB) is up 9.5% and although it is trading slightly lower Wednesday, ITB is within pennies of its 52-week high. The ETF could also be the beneficiary of a short-covering rally. [Improving Sales Data Lifts Homebuilder ETFs]

As the tweet below highlights, traders have established large short positions in some of ITB’s largest holdings. The 5% short interest in Toll Brothers (TOL), ITB’s fourth-largest holding with a  weight of 8.8%, is not excessively high, but some of the positions indicate these stocks (and ITB) could soar if shorts are forced to cover.

KB Home (KBH), the most shorted stock on the list, is ITB’s tenth-largest holding. Lennar (LEN) and DR Horton (DHI) are the ETF’s largest and third-largest holdings, respectively. Hovanian (HOV) is the only stock on the above list that is not a top-10 holding in ITB, but overall the names in that tweet combine for over a third of the ETF’s weight.

ITB is not the only sector or industry ETF that could benefit from a short-covering rally. Last week, we noted that traders had sold short a significant percentage of the iShares U.S. Telecommunications ETF’s (IYZ) weight.[Telecom ETF Could be Short-Covering Play]

Last month, Goldman Sachs’ Hedge Fund Monitor report said of the 23 stocks hedge funds are most heavily short, 14 are members of the Dow Jones Industrial Average, positioning the SPDR Dow Jones Industrial Average ETF (DIA) as another ETF that could get a short-covering lift. [Hedgies Short a Massive Part of Dow ETF's Holdings]

iShares U.S. Home Construction ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.