The Reflation Trade May Be In Trouble

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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

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


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


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


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

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. 

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