Over the intermediate term, consumer discretionary is on top, rallying more than 40% off the summer lows.
So this is one of the areas where I’m searching for strength right now.
It’s the traditional top-down exercise for picking stocks.
The best way to go about it is to use the relative trends and drill down from sector, to industry, and eventually all the way to the individual component level.
While doing this today, I was flipping through my discretionary industry charts, and the relative ratio for Homebuilders really stood out.
Here it is retesting a massive base breakout level from above.
This is the Dow Jones Home Construction Index $ITB relative to the Discretionary Sector SPDR $XLY.
If the ratio digs in and bounces higher here, this is a structural trend reversal for the homebuilders versus their peer group.
The relative trend for homies vs the broader market looks similar. We’re talking about multi-decade bases that are just now resolving higher.
The takeaway here is simple. Discretionary stocks are the market leaders and homebuilders look ready to embark on a sustained period of outperformance.
And it makes perfect sense when you consider the intermarket backdrop and leadership trends.
Homebuilders have been one of the best groups to be in this cycle. They are up there with semiconductors in terms of performance off the 2022 lows. They’ve also been in corrective mode for several months now.
This weakness has gone hand in hand with a big move higher from interest rates. Now that yields have been backing off, homies are rebounding in a big way.
I think they are ready to reassert their old leadership role. If rates roll over, look out.
As long as this relative trend reversal is valid, I’ll be adding more exposure to this group.
Buying weakness or corrective action within the context of primary uptrends is the secret to trend following.
These former bull market darlings are coming off a 20% corrective wave and ripping higher as intermarket tailwinds set in.
