The Reflation Trade May Be In Trouble
Michael Kramer | Jun 04, 2021 03:50
This article was written exclusively for Investing.com
The housing and transportation indexes are at a critical point based on their technical trends. They could be signaling a significant reversal in the broader equity market is nearby. Both of these sectors hold vital roles for the reflation and recovery trade. The Dow Jones Transportation Average and the PHLX Housing Index substantially outpaced the S&P 500 off of the March 2020 lows.
Now, the Dow Jones Transportation Average is very close to breaking a multi-month uptrend that could send the average lower by as much as 10%. Additionally, the PHLX Housing Index is now diverging from the S&P 500 in a meaningful way; the last time this happened was in 2018.
Dow Jones Transports/h2
The Dow Jones Transportation Average has recently fallen below an uptrend that started in the spring of 2020. It makes this an essential level as it could signify a change in trend is occurring. If the average were to revert to the lower trend line, which started in April of 2020, it could result in the average dropping more than 9%.
Housing Index/h2
Meanwhile the PHLX Housing Index is also testing a critical trendline as well. However, what is more concerning is that the Housing index has deviated from the S&P 500 in recent trading sessions. The HGX has already started showing signs of a trend change, with a lower high, while the S&P 500 has traded more flattish. The last time the two indexes went through a significant divergence occurred in the summer and fall of 2018. However, by the winter of 2018, the S&P 500 caught up with the housing index, with both falling dramatically, making the current divergence all the more important to watch.
UPS/h2
The weakness is easily observable in some of the major transportation and homebuilder stocks. United Parcel Service (NYSE:UPS), for example, has risen sharply since reporting quarterly results at the end of April. But more important here is that the shares have been clinging to support at $210 in recent weeks. However, should the equity dip below that price, it could sink all the way to $181 closing a gap created at the end of April.
FedEx /h2
FedEx (NYSE:FDX) is showing similar bearish trends after forming a rising wedge pattern. Additionally, the relative strength index is now trending lower, suggesting that bearish momentum has taken over the trading and that lower prices lie ahead. A break of the uptrend could send the shares lower towards $280.
PulteGroup /h2
PulteGroup (NYSE:PHM) is another stock that appears to be struggling after breaking an uptrend that started in March. Currently, it has made a lower high and is on the cusp of making a lower low, a reversal of the uptrend of the past few months. Additionally, a decline below support at $55 would trigger further losses to around $50.35 in the weeks ahead.
While these stocks and sectors are not all of the reflation trade, they certainly are a big part of it. Suppose they start to turn lower as the charts suggest. In that case, they could be foretelling further trouble for the overall health of the equity market and the other reflation sectors.
It makes watching the two sectors and a few of the stocks all the more critical as they could be serving an early warning sign of what is to come from the broader equity market.
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.