From the Desk of Ian Culley @IanCulley
Forget about Wednesday’s FOMC decision.
Yes, investors continue to react, unpacking Jerome Powell’s words while looking ahead to next month’s meeting. It’s a never-ending cycle proffered by unrelenting data.
But it’s this constant flux that makes the market the most engaging puzzle in the world (aside from life, of course).
Yet one piece of the puzzle renders the chaos manageable…
The closing price.
That’s the main reason I choose to devote the majority of my energy to price charts. The closing price is seldom revised, acting as an anchor during turbulent conditions.
Call me old school, but price is never wrong.
With that in mind, let’s take a fresh look at a key intermarket ratio many (including me) have labeled “broken”...
I'm talking about regional banks versus REITs.
This ratio belongs to a long list of intermarket relationships that haven’t jibed with the explosive rise in rates. But that doesn’t render the ratio wrong or devoid of insight.
Instead, Regional Banks ETF $KRE is simply stuck within a broad decadelong range relative to REITs $IYR:
KRE/IYR is finding support at a logical level – a critical shelf of former lows.
In fact, it’s currently bouncing off the same levels it did in June 2016 – which wasn’t a bad time to buy US stocks, if I recall correctly. (The S&P 500 gained roughly 44% over the following eighteen months.)
And if we revisit its broken relationship with interest rates, one constant remains intact…
The US 10-year yield and the KRE/IYR ratio continue to peak and trough together.
Yes, the structural trend for interest rates has been higher, while regional banks have chopped sideways relative to REITs. But I think it’s safe to call this a conscious decoupling with open lines of communication.
Intermarket relationships come and go – it’s a fact.
But notice KRE/IYR is digging in at levels that not only coincide with significant bottoms in the ratio but also in the 10-year yield (2015, 2016, 2020, and potentially 2023). On the flip side, both charts stopped going up around the same time in 2013, 2017, 2018, 2021, and 2022.
Perhaps that’s the insight gleaned from the relationship, not the underlying trend.
A sustained rally in KRE/IYR ratio suggests the stock market is ready to handle the rising rate environment, whatever that entails for yields – sideways or higher.
Either way, I don’t want to ignore KRE/IYR simply because it challenges conventional wisdom or appears out of step.
Remember, price is always right.
Stay tuned!
Countdown to FOMC
The market is now pricing in a 25-basis-point hike next month, following Wednesday's decision to pause.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of June 15, 2023.
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And let us know what you think.
