In a healthy bull market, you want to see offensive groups performing well. When these groups lack strength, it often signals problems ahead for the broader market.
Homebuilders, one of the most cyclical subsectors within the Consumer Discretionary space, come to mind when discussing this theme.
They are a reliable gauge of global growth and investor risk appetite.
Historically, when these stocks trend higher, it reflects an environment conducive to risk-seeking behavior. On the flip side, sustained selling pressure on them tends to indicate a more cautious market stance.
When we overlay the SPDR S&P Homebuilders ETF $XHB with the S&P 500 $SPY, they typically follow the same path.
Homebuilders often act as a leading indicator for the broader market. The chart highlights multiple instances where XHB peaked or bottomed ahead of SPY, providing valuable signals about shifts in market sentiment and trends.
What stands out now is that XHB is currently down almost 20% from its all-time highs.
Whether it’s higher interest rates or weakening demand in the housing market, the divergence here cannot be ignored.
This raises questions about whether this divergence signals potential turbulence ahead or is merely an isolated correction in a specific group.
If XHB’s weakness persists, it may suggest a more cautious outlook. However, a recovery in homebuilders could signal renewed confidence and risk appetite.
In an environment where semiconductors are holding up, defensive rotation is absent, and credit stress is minimal, the divergence in the "homies" stands out.
Let’s keep a close eye on this group in the weeks to come—it might just hold the answer to what lies ahead for the broader market.
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