Gavekal Capital: Homebuilders Characteristic Of Rotation Out Of Early Cyclicals

Monday, May 19, 2014

Homebuilders Characteristic Of Rotation Out Of Early Cyclicals

We divide all stocks into baskets in an attempt to understand market internals.  All stocks are divided into four groups: 1) early cyclicals, late cyclicals, hyper-cyclicals and counter-cyclicals.  The early-cyclical basket is comprised of consumer discretionary stocks, while the late cyclical basket is comprised of industrial and material stocks.  Generally, as a fed tightening cycle begins, early-cyclicals underperform late cyclicals.  In the chart below we map the relative performance of early-cyclicals vs. late cyclicals, alongside the 3-month increase in the Fed's balance sheet.  As the Fed expanded its balance sheet over the last few years, early-cyclicals outperformed, but since early March they have significantly underperformed.

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The homebuilders are great example of  the rotation out of early cyclicals.  Below is our point-and-figure chart of PulteGroup that tracks relative performance compared to the MSCI World index.  After a strong run, off the lows of 2011, PulteGroup has broken the uptrend line and appears to have entered a new downtrend compared to the MSCI World index.

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