Real Estate Stocks: Homebuilders or REITs?

My good friend Alex recently brought this chart to my attention. It is a 4 year look at a basket of Homebuilders vs the Vanguard REIT ETF. Notice how for a long time now, these Real Estate Investment Trusts have been outperforming the Homebuilders. I suppose it makes perfect sense, as investors search for yield in a zero-interest rate environment while shying away from the disaster that has been homebuilding.

Here is the $XHB vs $VNQ chart:

The first thing that I notice is the break in the downtrend early this year. Meanwhile, for the last 2 years, the ratio has been forming what appears to be a massive Head & Shoulders Bottom. The fact that it has taken this long to develop is a good thing. Bottoms of this magnitude are a process, not a single event.

The neckline is sitting right around 0.35 just as the 40 week moving average has turned up and acting as support. But I don't think there is a trade to be made right this second. Unless you want to take a shot with a stop below the recent lows from a couple of weeks ago.

I think the move is to wait and let this trade develop. We have a fixed level of resistance here going back several years that still needs to be taken out to confirm a change in trend.

But most importantly, I think this chart tells a great story. I'm curious to hear some what some of you fundamental guys think about this potential shift. How about the real estate guys - what do you think?

Hat Tip Alex