Here's the major risk facing the rally in homebuilding stocks

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A bear case for homebuilders is coming out of the woodwork.

The group has been on a tear in 2019, with the SPDR S&P Homebuilder ETF having its best quarter since 2012, up over 18 percent, and the iShares U.S. Home Construction ETF tacking on a 19 percent gain for the year.

Recent earnings reports from homebuilders Lennar and KB Home provided further fuel for the rally, but weaker-than-expected February housing starts are creating jitters among market watchers.

“The one thing that really concerns me is in the new housing numbers,” Michael Bapis, managing director of Vios Advisors at Rockefeller Capital Management, told CNBC on Wednesday. “They were down 8 percent in February, which is the worst it’s been in eight months, so we’re taking our profits in this space.”

Speaking on “Trading Nation,” Bapis noted that of all of the variables that give him pause when it comes to investing in homebuilding — including mortgage rates, home prices and the real estate environment — housing starts data are the most worrisome.

“[The sector has] run up significantly, roughly 30 percent in the last quarter and annually, so I would just take our profits, sit back, wait ’til the summer shakes out and then see what happens in the fall,” Bapis said.

In focusing on the technical landscape, Miller Tabak’s Matt Maley sees a “battle going on between the fundamentals and the technicals.”

“The strategist in me [is] concerned about the housing starts number from the other day,” he said in the “Trading Nation” segment. “If that continues to fall, we’ve got a problem, because every time you’ve seen a sustained decline in housing starts, it’s always followed by a recession, going back to the 1960s. However, on the technical side, it looks quite good.”

Maley, managing director and equity strategist at Miller Tabak, noted that when the rest of the stock market was collapsing in late 2018, the aforementioned iShares U.S. Home Construction ETF was “stabilizing,” usually a bullish sign.

“It’s rallied nicely since then, 25 percent, broken well above its trend line going back to the beginning of 2018, and it’s made a couple of higher lows and higher highs,” Maley said. “So, if we could take it one step further and get above those February highs and give it a more meaningful higher high, it’s going to be quite bullish and show that the intermediate-term trend has changed in the group. So, there’s a battle going on, but the technicals look quite good.”

Disclosure: Vios Advisors and Rockefeller Capital Management have positions in Lennar.

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