"Everyone has a plan 'till they get punched in the mouth" - Mike Tyson

December 04, 2012

Housing, Equity market rallies near an end?

     I love ratio charts.  When used correctly, the markets often tell a story.  Two real estate related ratio charts are telling a hell-of-a story, and they scream caution.

     The first chart is Real Estate/Housing.  This ratio has led the market by 1-3 months at major turning points the past couple of years.  This ratio moving lower is bullish and higher bearish, as the home-building stocks are more economically sensitive and dividend paying REIT's are a nice place to hide out when the markets correct.



     You can see the downside momentum has stopped as RSI has formed a pronounced divergence. With a price bottoming pattern in place you can expect housing stocks will weaken over the next few months.  No problem, right?  Housing stocks are just extended, right??  Well....


     This second chart shows IYR/SPY. IYR strength generally indicates defensive posture by funds. The ratio could be truncating a targeted move lower and reversing higher.  Generally, you would say that bodes very well for IYR, but after a price analysis you can see the ETF completed a rising wedge top in September.  Therefore, it likely will not make a move much higher from here.  The chart is saying IYR will regain strength as the market heads south!!    


To recap:

Housing stocks look done for now on the upside.  They've had monumental runs in the last 14 months, but they need a rest.

REIT's are starting to see relative strength, but they have limited upside(read: downside is ahead).

My take -- We may have a bit more trading to the upside into the EoY, but this action indicates significant weakness in early 2013.


***UPDATE***: 3/5/13 Gosh this was wrong looking back wasn't it?  Perhaps it says something about how under invested folks were at the drop in November.  

Reminder:

All ideas shown on this blog represent the authors opinion based on the data available.