From the desk of Steve Strazza @Sstrazza
We haven’t talked much about Real Estate $XLRE lately because there really hasn’t been much to say. Over just about any timeframe, it’s underperformed the S&P 500 $SPY, which we’ll illustrate with a ratio chart below.
Price is basically unchanged over the trailing year. The only sectors that have performed worse are Industrials $XLI, Financials $XLF, and Energy $XLE. This is not a group you want to be associated with.
Looking at the chart, you’ll notice it’s gone nowhere for much longer than just the past year. XLRE has actually been chopping around in a messy range for the better part of four years now!
This week’s Mystery Chart was a daily candlestick chart of XLRE. Thanks to everyone who participated. Most of you wanted nothing to do with this one, and I can’t blame you.
I’ve added the 200-day moving average to help illustrate that the primary trend here is sideways at best. The question we had posed with our Mystery Chart post was whether or not price would be able to break back above the upper bounds of its current range near 34. It since has, and in order for the current rally to remain intact, we need to see prices hold this level.
Despite reclaiming its former highs, XLRE is still a “hot mess.” There is really nothing actionable about this chart right now, as it’s in a short-term uptrend but the long-term bias is neutral. Although, there is still plenty of information we can get from analyzing Real Estate from an intermarket standpoint.
In the next few ratio charts, we’re going to use the iShares Real Estate ETF $IYR instead of the Sector SPDR. The reason for this is because we are looking at long-term charts and IYR was launched about 20-years ago as opposed to XLRE which we only have about 5-years of data for (launched October 2015).
This chart shows the US 10-Year Yield $TNX overlaid with Regional Banks $KRE relative to Real Estate $IYR. Notice the strong positive correlation between the two.
As such, we can use turning points in the KRE/IYR ratio in order to identify potential reversals in yields. For example, the last couple of times the ratio found support near its current level ~0.45, yields also bottomed and began to trend higher.
The question now is, what is the ratio currently telling us? If Real Estate shows even the slightest outperformance, this ratio is at risk of violating its key prior lows. In such an environment, yields are likely breaking to fresh lows as well and Bonds are once again looking attractive.
In fact, the US 5-Year Yield $FVX already made new all-time lows this week.
It has historically been an excellent leading indicator, so we’re not taking this lightly.
Just as you’re probably thinking things aren’t looking so good for yields, take a look at the secular downtrend in Real Estate relative to the S&P 500.
With this kind of underperformance, as price recently tested its all-time low from 20-years ago, maybe Regional Banks stand a shot. It shouldn’t be too hard to outperform something that’s breaking to fresh lows within the context of a 15-year downtrend… or is it?
Well, it just so happens that Regional Banks recently made all-time lows vs the S&P 500, and actually look even worse than Real Estate on a relative basis. Here’s a look.
Earlier in the year, the ratio breached key support and collapsed into April. Price has chopped sideways since, forming a potential bullish momentum divergence as it tries to carve out a tradeable low. Financials as a group don’t look any better relative to the S&P. We recently wrote about this which you can read here.
Last but definitely not least, we have to consider the fact that Real Estate looks better than Regional Banks on an absolute basis right now. XLRE is back above key former resistance at its prior highs. Meanwhile, Regional Banks are still trapped well beneath resistance at their 2018 lows. They’ve also been one of the more lackluster performers off the March lows even after being one of the hardest-hit areas during Q1’s selloff.
Another important intermarket signal for yields, the Copper/Gold ratio, made a lower high beneath overhead supply at its 2016 low this week. For now, the jury is out on yields and the reflation trade but as more and more evidence comes in it’s beginning to weigh heavier in the direction of rates heading lower.
Thanks for reading and please let us know if you have any questions!