HOME BUILDERS AND REITS CONTINUE SHOWING RELATIVE
HOME BUILDERS AND REITS CONTINUE SHOWING RELATIVE STRENGTH...
Wed, May 16 2012 11:49 AM ET
Even though the finance and consumer discretionary sectors are on the verge of breakdowns and trend reversals, there are pockets of relative strength to be found within these sectors. Since mid April, five sectors are down and three are up. The Consumer Staples SPDR (XLP), Healthcare SPDR (XLV) and Utilities SPDR (XLU), which are the defensive sectors, have attracted money during the most recent decline. This makes sense because money gravitates to relative safety during a broad market decline. Outside of these three sectors, we are seeing continued relative strength in the home building group and REITs. Homebuilders come from the consumer discretionary sector, while REITs are in the finance sector. The link makes sense because both are tied to real estate and real estate is performing quite well at the moment. Real estate represents an alternative to stocks, there is little exposure to Greece and financial regulation is aimed at the big banks. REITs also provide decent dividends, which count in a low interest rate environment. Chart 6 shows the Home Construction iShares (ITB) trading near a 52-week high and well above the April low. Prices just continue to zigzag higher. Chartists may be wondering how to jump on a moving train with a better risk-reward ratio. One suggestion is to use a short-term momentum oscillator to identify oversold conditions. The indicator window shows 5-period RSI dipping below 30 five times since the rally began in early October. A subsequent surge back above 50 signals that momentum has turned up from oversold levels. Keep in mind that past performance does not guarantee future performance.
Chart 7 shows the Real Estate iShares (IYR) within a clear uptrend and well above its April low. A falling flag is taking shape the last two weeks as IYR works off overbought conditions. 5-period RSI dipped below 30 for the fourth time since the October low.
