From the Desk of Steve Strazza @Sstrazza
Have you heard about the rally in the bond market?
After a severe multi-year drawdown, bonds have carved out a massive basing pattern and are putting the finishing touches on a primary trend reversal.
More importantly, interest rate-sensitive stocks are following suit and rallying higher as rates come down.
The sector with the highest correlation to bonds, Real Estate, is also putting the finishing touches on a bearish-to-bullish reversal.
With the market under pressure in recent weeks, Real Estate's relative strength and resilience stands out in a big way.
This once left-for-dead group of stocks is now the sector leader over the trailing month and quarter.
The only responsible thing for us to do is dive beneath the surface and find the strongest individual names to use as vehicles to play this trend.
Before we do that, let's set the stage.
Here is a look at those multi-year bases in bonds and real estate. Notice how they look the same:
If these resistance zones are cleared, the path of least resistance for both these asset classes shifts higher.
After a prolonged period of underperformance, Real Estate is screaming higher versus the S&P 500 on a market-cap and equal-weight basis and making new multi-month highs in relative terms:
So not only is real estate on the cusp of a primary trend reversal on absolute terms, but the relative trends are beginning to favor these stocks as well.
In the case of the cap-weighted relative trend, XLRE/SPY just registered its highest daily momentum reading in history, breaking higher from a multi-year downward-sloping channel.
This is the kind of starting point momentum we want to see at the initiation of a new trend.
On the weekly RRG, Real Estate has been improving for several months and is now rotating toward the leading quadrant:
Here is the Real Estate Sector SPDR pressing on the upper bounds of a textbook rounding bottom reversal pattern. Notice how the 200-day moving average has finally curled higher beneath price, indicating a new uptrend is underway:
For those looking to use the sector index as a vehicle, we like XLRE above 42 with a target of 51. While you wait, you can earn a 3.25% yield.
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