Price Action & Performance
A quick bullish reversal has taken hold of the XLRE in July. To put it simply, we think prices have come too far too fast and is likely to consolidate gains over the next month. On a price basis, the sector broke out to new YTD highs while the Sector and each Industry outperformed on a relative basis. We saw an expansion to 6 new 52-wk highs among XLRE constituent stocks. Oscillators are beginning to roll-over from overbought conditions. We would look for the price gap between $38 and $39 to eventually be filled before further upside progress is made. We will be looking for sustained success from the current overbought conditions to change our stance on the Sector’s prospects.
Economic and Policy Drivers
This has been a period of renewed rotation as expectations for interest rate policy in the second half of the year come into focus. Rate cuts are expected as soon as September and the XLRE has re-rated higher. We expect the rush to new things will not be static. As investors swooped into oversold Real Estate stocks a few weeks ago, we think that cycle will start anew. We note Commodities Prices have steeply discounted over the past two years and are at support on the chart.
Moreover, there are good reasons for weak Real Estate performance in 2024. Persistently high interest rates are historically a headwind for the sector. The Pandemic introduced a technology-enabled, cultural/behavioral headwind in the form of “work-from-home” that has obliterated the marginal growth prospects of the Commercial Real Estate Industry. Commercial to Residential conversion costs for existing buildings remain high and interest rates, while lower, remain higher than previous cycles.
In Conclusion
XLRE has been a structural laggard since the bull market trend’s inception in early 2023. July saw the Sector move rapidly from oversold to overbought conditions. We’re betting on some retracement in August. We are selling out of XLRE for August resulting in a -2.31% allocation vs. the S&P 500 Index.
Chart | XLRE Technicals
- XLRE 12-month, daily price (200-day m.a. | Relative to S&P 500)
- XLRE reversed to the upside in July, but the bet here is the move is counter-trend
Data sourced from Bloomberg
