Playing Devil’s Advocate

As market participants, objectivity is everything as it allows us to flip the script when necessary.

That’s why I’m always on the lookout for cracks in my thesis.

One way to do that is by playing devil’s advocate, which is identifying data points that challenge our view and force us to rethink our perspective.

Adapting to new evidence isn’t just an edge; it’s a necessity to be successful in this business.

Right now, when it comes to data points that challenge a bullish case for equities, the weakness in home construction stocks stands out. 

The Home Construction ETF $ITB is breaking to new lows relative to its defensive peer group, the Real Estate ETF $IYR.

This ratio has historically acted as a leading indicator for the broader market.

You can see clear divergences where ITB/IYR tops or bottoms ahead of major turns in the S&P 500 during prior cycles.

While this is just one specific group, it is important to keep an eye on this trend.

After all, the bulls want to see offensive sectors perform well.

Alfonso