One of the reasons that I’ve gone neutral when I saw trouble ahead rather than getting outright bearish is because of the continued strength in the housing recovery. Evidence continues to point to a very difficult bull market (one of the toughest). The signals are mixed and the price action is choppy, but the overall trend is still higher. For that to change the chart below will have to break first.
Below is a chart of the ratio of iShares Dow Jones US Home Construction ($ITB) and the SPDR S&P 500 ($SPY). As you can see from the chart, this has been a driver of the last bull run. While there was a slight underperformance of $ITB on the latest market pullback, now housing is outperforming once again on this bounce, with the market up over 1.5% as of this writing. Leadership will be passed if the rally is to continue (I’m looking at $XLF and $XLK), but the price action is constructive.
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