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Two housing stocks could be building toward a breakout, traders say

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Buy the housing boom, says investing pro

Home construction stocks have been hitting the nail on the head over the past month.

The ITB Home Construction ETF is up 7% in the last month, its highest level since April 2018. The group of stocks has rallied as the S&P 500 has fallen nearly 2%.

Tradinganalysis.com founder Todd Gordon is eyeing the largest of the homebuilders — D.R. Horton.

There is "a really nice technical pattern here, sort of an inverse head and shoulders. … We're through just at about $48. It's a pretty good jumping off point to see if we can get those highs," Gordon said Thursday on CNBC's "Trading Nation."

D.R. Horton has climbed over 45% this year, a rally Gordon says has largely been driven by lower bond yields and interest rates.

"Let's look at the 10-year yield. … We've broken below the 2% level, making new lows there, which is driving housing. The one thing I would say is [there is] a little bit of divergence. You have the ITB not yet at those old highs, so we are playing a little bit of a catch-up here. I think yields need to continue to drop to see buying in housing," Gordon said.

The 10-year Treasury yield briefly inverted below the 2-year yield on Thursday. It did so last week for the first time since 2007, preceding the financial crisis. A yield curve inversion is seen as a historical indicator of a coming recession.

Quint Tatro, founder and president of Joule Financial, agrees it's a good time to break ground on homebuilders.

"We still like housing. Interest rates are going lower, the consumer is still strong, and again, we're not in this recession camp," Tatro said.

Home construction activity is often dependent of strength in the broader economy. Tatro says a smaller stock within the ITB has been on his radar.

"We like to pinpoint valuation, so look at MDC Holdings. The company has a 3% dividend, $7 per share in cash, very attractive balance sheet, but its selling 10x forward earnings and growing next year's earnings at 20%, so again, I think we steer away from some of the bigger names, look regionally, and we like MDC Holdings here." Tatro said.

MDC Holdings is up nearly 44% this year.

Disclosure: Joule Financial has a position in MDC Holdings.

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