Divergence City + Bonds Break Out!

JC Parets
June 10, 2021

Have you seen Homebuilding stocks getting hit?

It's not happening at a random spot either. The upside objectives were hit, as we discussed on last week's call, so this would be a perfectly logical place for this correction to take place.

But the chart of the week has to be Homies relative to REITs. With Real Estate Investment Trusts (REITs) breaking out on both an absolute AND relative basis, it makes this chart that much more dramatic.

This is the true story:

With a bearish Momentum Divergence and failed breakout, this one continues to remain vulnerable.

Let's keep in mind what the differences are. Here are the breakdowns in components between the iShares Home Construction and iShares Real Estate:

There are major differences between the two, in terms of yield, and from the perspective of risk appetite.

Needless to say, things are not the way they were before.

We're seeing consolidations all over the place resolving lower, not higher. We discussed the consequences of that two weeks ago.

Meanwhile, the divergences keep adding up. We had a nice list going already, but here's a bearish momentum divergence and failed breakout in High Beta vs Low Volatility:

It's been a beta chase the whole way up, since this bull market first got going last Spring.

But this is not that.

And as it turns out, neither is sentiment.

We've already seen a lack of bearish sentiment, but you can add this chart below to the list of rubber bands being stretched.

When you combine the Investors Intelligence survey with the AAII data, you're looking at the fewest stock market bears since January of 2018:

Do you remember what happened in January of 2018?

Risk peaked.

Everything all over the world started to fall in price for years to come.

And I'm not necessarily saying that we need a multi-year bear market. But a sentiment adjustment of some kind is probably warranted.

And I think that's what the bond market is telling us.

If this was really the runaway inflation the journalists keep telling us about, then why are Treasury Bonds breaking out?

This seems like an odd way for the biggest and smartest market in the world to price in inflation.

To me, the bond market is telling us the exact opposite.

And I think commodities are telling us the same. You see Lumber and Copper lately?

I call bullshit on the inflation narrative. I think bonds do too.

JC

 

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