[Chart Of The Week] Banks And Real Estate Point To Higher U.S. Interest Rates

JC Parets
March 7, 2017

Intermarket Analysis is a fantastic tool that is available to us as technicians regardless of our time horizon. Certain gauges of risk appetite, or risk aversion, can be seen simultaneously throughout various asset classes. We use these correlations as confirmations or divergences from data we're getting elsewhere. Today I want to focus on the direction of the U.S. Interest Rate Market and compare it to the data we're getting from Regional Bank Stocks and Real Estate Investment Trusts. The relationship between Banks and REITs is similar to the tug of war going on between investors in the Bond Market. 

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[hide_from visible_to="member"]Here is a chart of the Regional Bank Index ETF $KRE vs the Real Estate Investment Trust (REIT) ETF $IYR. You can see a nice breakout in the 4th quarter last year followed by a 8-10 week consolidation of those gains. Plotted below is the U.S. 10-year yield showing an eerily similar breakout in the 4th quarter followed by exactly the same consolidation as that in the ratio above:

KRE-IYR

You see, when investors believe interest rates are going higher, they are more inclined to put money into Regional Banks who, in theory, benefit directly from higher rates and spreads. Meanwhile, if rates are rising, there is less need to invest in higher dividend paying REITs, and more reason to focus on growth stocks. On the flip side, if the market believes rates will fall, there is less incentive to invest in Regional Banks and much more reason to buy higher dividend paying REITs in order to lock in that yield. These are a few big reasons why the ratio between the two sectors looks exactly like US Interest Rates.

If you think rates are going higher, you want to see this spread between Regional Banks and REITs resolve to the upside of this consolidation since the end of last year. If prices are above the December highs in both of these plots, I would argue Bonds are likely in for their next leg lower.

If you're looking for a turn lower in rates, I think this spread will likely be the best heads up. If we start to see a rollover in the ratio between Regionals and REITs, interest rates will likely follow and Bonds will catch a bid. But based on the weight of the evidence in front of us, I think this is the lower probability outcome. I expect this trend to continue higher in both of these plots above. An upside resolution from these consolidations will confirm that thesis.

Cheers,

JC

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