Another area to look to validate all of the claims of economic recovery is in the epicenter of our current economic malaise.  Real estate related stocks (homebuilders and real estate ETFs) were decimated during the decline as real estate values plummeted and inventories of unsold homes rose.  Stocks are a great discounting mechanism for future earnings and outlooks, and so far these stocks are saying that a recovery is still not imminent. 

Once again we will examine a couple of spread relationships to demonstrate that real estate stocks are lagging the market, not leading an economic recovery.   Spread charts show over performance or under performance of a particular group or sector relative to the broader market.  In this case the broader market is represented by SPY (the S&P 500 ETF).

The first chart shows the spread between IYR and SPY.  IYR is a real estate investment trust ETF that holds primarily REIT stocks.  When IYR is outperforming SPY, the black line will rise, when IYR is lagging SPY, the black line will fall.  As you can see from the daily chart below, the IYR:SPY (black line) spread lags the broader market as shown by SPY (red line).   AS SPY pushed out to its June high, the IYR:SPY spread lagged badly, making a lower high and pushing lower after that. 



Next we will take a look at the homebuilders vs. SPY.  The black spread line is the spread between XHB and SPY.   Notice in this case how the XHB:SPY spread has been in a nasty downtrend since April.  As SPY pushed out to its June high, XHB kept careening lower.  There has been excitement lately about the earnings and outlook for some individual homebuilders.  While the news has been warmly received on an individual basis, the group as a whole has much farther to go before we can declare the worst over for real estate.