The Regional Bank SPDR (KRE) and the Home Construction iShares (ITB) have led the market higher since October. ITB is up over 50% since early October and KRE is up over 40%. The chart below shows ITB in black and KRE in red. Notice how these two moved step-for-step over the last 18 months. Both peaked in January 2011 and then bottomed in early October. Both ETFs recently recorded new 52-week highs when they exceeded their 2011 highs in February and again in March. While the trend since October is clearly up, these two are overbought and ripe for some sort of corrective period, which would involve a pullback or sideways consolidation.
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The indicator window shows the Correlation Coefficient (KRE,ITB) confirming that these two have been positively correlated for most of the last 18 months. In fact, the Correlation Coefficient has been above .50 most of this time, which shows strong positive correlation. With this in mind, chartists should watch the Home Construction iShares (ITB) for clues on the Regional Bank SPDR (KRE) and visa versa. As the two market leaders, chartists should also watch these two closely for signs of a broader market correction.
Arthur Hill CMT