Housing stocks could be building a solid foundation for a breakout.
The ITB home construction ETF has rallied nearly 5% in February, putting the group in spitting distance of all-time highs not seen in 14 years.
"I absolutely love the space and I think this is largely driven by the overall macro environment," said Danielle Shay, director of options at Simpler Trading, on CNBC's "Trading Nation" on Tuesday. "We have strong consumer spending numbers, low unemployment. We also have a Fed that cut rates multiple times last year so, of course, the housing market is going to be booming."
Top stocks in the ETF such as Home Depot, Lowe's, Sherwin-Williams and D.R. Horton are all sharply higher. Stocks such as Lennar, Toll Brothers and PulteGroup are all at or less than 1% from 52-week highs.
After such a strong run, Miller Tabak chief market strategist Matt Maley sees a weakness on the horizon. He called the rally in 2019, but is hitting pause on the group at this point.
"I'm getting a little bit more cautious on the group," Maley said during the same segment. "It's getting overbought, not only on a short term, but on an intermediate term basis ... [Its] weekly RSI chart [is] getting up to levels that have been followed by at least near-term pullbacks in the past."
Its weekly relative strength index, or RSI, which measures momentum, has climbed to 72 — any reading above 70 signals overbought conditions. In January 2018 when it reached a level more overbought than this, it fell 31% for the year.
"It's going to be tough whenever you get any group, any ETF, pushing up against the key resistance level at the same time that it's very overbought. It makes it tough to break out, so I'm not saying sell the group or dump it, but you might want to hold off adding new money to see if it pulls back a little bit here," said Maley.
Shay agrees that it could see some eventual weakness but says first a few standout stocks could push the entire group through to new highs.
"We have Home Depot and Lowe's ... that are reporting earnings in the next two weeks. I'm looking at Lowe's because it's consolidating right now and it looks like it wants to break out to a new high," said Shay. "Those names are going to help carry the space to a brand new high. After that, I think that we should look for a bit of a pullback."
Home Depot is set to report Feb. 25 and Lowe's is scheduled for Feb. 26.
Disclosure: Shay holds positions in Home Depot and Lowe's.