S&P 500: Bear Market Rally? Homeowners as a leading indicator

So, is this a bear market rally for the S&P 500, or is an epic short squeeze to come? Almost every active investor is asking themselves this question in the current environment. Are there fundamental leading indicators that already indicate future developments? In their latest video, the Game of Trades analysts present another indicator that shows an amazing correlation to the stock market. The US Homebuilders Index, tracked by the SPDR S&P Homebuilders ETF (XHB). This ETF groups together stocks such as DR Horton (DHI) and Lennar Corporation (LEN), America’s big home builders, and The Home Depot (HD), a major hardware store chain. Together they form a good indicator for construction activity in the USA, and the construction industry is generally regarded as a leading economic indicator.

S&P 500: How does Game of Trades analyze the market?

The creators of Game of Trades see the stock market as a highly complex “machine” that needs to be set up with the right information and parameters in order to generate sustainable returns. In addition to technical analyses, fundamental data also flow into the considerations of where the market is most likely to move in the future. Hence the many indicators and historical comparisons with which the analysts feed their “stock market slot machine” and present them in their YouTube videos.

Bear Market Rally or Short Squeeze?

Die last The thesis put forward in the Game of Trades videos that the current recovery in the S&P 500 might continue is constantly being reviewed by analysts. Because one question is currently dominating the market – was this just a bear market rally or does the short squeeze continue? The same picture has been circulating on social networks since the middle of the year, the course of the S&P 500 in 2008, the first year of the financial crisis, compared to this year’s course. So if you put both charts on top of each other, you see amazing parallels (blue line – 2008):

Investors’ fears are therefore justified, and a certain similarity cannot be overlooked. And no investor wants to enter the stock market just before the final sell-off. But no investor wants to miss out on an incipient bull market either. The tension is therefore great on both sides, and the discharge might take place correspondingly impulsively, in one direction or the other. To test their thesis on whether the S&P 500 is in a bear market rally or following a larger bullish momentum fueled by a short squeeze, Game of Trades analyzes the homebuilders index, tracked by the SPDR S&P Homebuilders ETF (XHB).

The star investor Stanley Freeman Druckenmiller used the home construction index to better predict market developments, according to Game of Trades. Stanley Freeman Druckenmiller is a well-known stock market star. He managed George Soros’ Quantum Fund as lead portfolio manager for many years and was instrumental in the legendary speculation once morest the Bank of England. So how do you use the Homebuilders Index and what is its validity? A look at the chart before the Covid crisis shows the strength of this indicator:

While the S&P 500 continued to climb (green arrow), the Homebuilders Index no longer followed this upswing (red arrow). A similar pattern existed earlier this year as the S&P 500 continued to drift away from the Homebuilders Index. Here is another chart since the beginning of the year, which superimposes both price developments:

The colored framed area is interesting. The further increase in the S&P 500 (orange line chart) is no longer supported by the Homebuilders Index. A short time later, the rally in the S&P 500 was over and the market slipped to new lows. Otherwise, both courses are very closely correlated to each other.

The Homebuilders Index is also useful as an early warning indicator. If the current trend there turns out to be short-term and corrective, like it Rüdiger Born explained once more and once more with examples in his chart analysis videos, a renewed, impulsive downward wave should be expected. According to Game of Trades, this would be the moment when the drawn down trend channel is exited to exit the stock market. Here is the chart, the theoretical course is shown in black:

If the Homebuilders Index falls, it might be an early warning sign to flee the stock market. Then the rally since the beginning of October was actually just a bear market rally, and following that, in theory, there follows another downswing with new, lower lows, as the analysts call it. Another Research Incidentally, this article showed that the early indicator of the early indicator of home builders are the demolition companies. If the order books there are empty – then it’s probably “game over”.

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Disclosure according to § 80 WpHG for the purpose of possible conflicts of interest:

The author of this publication declares that he can invest in any of the financial instruments mentioned and analyzed or commented on at any time. This may result in a conflict of interest. However, the author assures that every analysis and every market commentary has been prepared in compliance with journalistic due diligence requirements, in particular the duty of truthful reporting and the required expertise, care and conscientiousness.
This publication does not constitute investment advice. It is also not a recommendation to buy or sell securities or other financial instruments. Past performance is no guarantee of future results. The analyzes provided are for information only and cannot replace individual investment advice. Liability for indirect and direct consequences of these suggestions is therefore excluded.

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