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The Reflation Trade May Be In Trouble

By Michael KramerMarket OverviewJun 04, 2021 03:50AM ET
www.investing.com/analysis/the-reflation-trade-may-be-in-trouble-200584181
The Reflation Trade May Be In Trouble
By Michael Kramer   |  Jun 04, 2021 03:50AM ET
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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

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%.

DJT Daily
DJT Daily

Housing Index

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. 

PHLX Housing Daily
PHLX Housing Daily

UPS

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.

UPS Daily
UPS Daily

FedEx 

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. 

FedEx Daily
FedEx Daily

PulteGroup 

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. 

PHM Daily
PHM Daily

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. 

The Reflation Trade May Be In Trouble
 

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The Reflation Trade May Be In Trouble

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Comments (12)
Colonel Forbin
Colonel Forbin Jun 04, 2021 11:55PM ET
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You and Pryz are the biggest Dodo’s on the site
Bat Man
Bat Man Jun 04, 2021 12:50PM ET
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The credit bubble is going ti burst soon.
Hape Fritt
Hape Fritt Jun 04, 2021 12:37PM ET
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Thanks Mike. Just bought Oct 195 puts. I agree with your take.
Miguel Massens
Miguel Massens Jun 04, 2021 11:50AM ET
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a simple ratio chart of DJI ÷ DJT shows the reversal has already began. it's happening.
Billy Wood
Billy Wood Jun 04, 2021 11:23AM ET
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Too many coulds, ifs, and mights to be taken seriously. Take a stance or don't write at all. Personally, I believe your analysis is off the mark.
Jay Rhyder
Jay Rhyder Jun 04, 2021 11:23AM ET
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yea... all I got from this article was a lot of speculation. A lot of "maybe" or "may not be"... not very helpful.
Notvery Goodathis
Peteymcletey Jun 04, 2021 11:09AM ET
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Reflation trade was so late 2020. inflation trade is the new awesome
Duncan bassey
Duncan bassey Jun 04, 2021 11:04AM ET
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can't login my account
Hichem Trabelsi
Hichem Jun 04, 2021 11:03AM ET
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Realistic analysis as usual ! thanks !
legal issues and law
legal issues and law Jun 04, 2021 11:03AM ET
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my account is not login
Daniel Morel
Daniel Morel Jun 04, 2021 10:14AM ET
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Once again : short term readings that are not relevant unless you are a minute to minute trader - let’s be serious! You can read all the charts but do you really believe that housing os getting cold and that UPS will stop delivering packages ?
Hichem Trabelsi
Hichem Jun 04, 2021 10:14AM ET
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I dont think that's what was meant by Michael.. in recession times, people save their money and prefer dont invest in houses.. Same to transportation, in periods of crisis, people dont consume at same levels and don't spend compared to normal times, so transportation gets affected as the volume is very important in that business area .. the charts they dont say everything, but they could indicate positive/or negative signs in the market as they reflect somehow the consumer / investor psychology..
Stephen McKinney
Stephen McKinney Jun 04, 2021 9:53AM ET
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Thanks Michael
Leon Kelly
Leon Kelly Jun 04, 2021 6:54AM ET
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Michael, you're the man!!!. Very informative
 
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