Today was a great example of how relative weakness can tip you off to a short trade before the news ever hits the tape. Above is a 5-minute chart of XHB, the homebuilders ETF, with the SPY shown in the lower pane for comparison. Around 12:20 ET, something important stood out to me in real time. The SPY was pushing to new intraday highs, yet XHB was doing the exact opposite, it was putting in a lower high. That divergence immediately caught my attention.
When the broader market is strong and a sector can’t keep up, that’s relative weakness, plain and simple. It tells you money is quietly moving out, even if prices haven’t fully broken down yet. I saw it as it was unfolding, but I didn’t take the trade because I don’t actively day trade the homebuilders. Still, the message was clear: XHB was not confirming the market’s strength.
About ten minutes later, around 12:30 ET, the catalyst arrived. News broke that President Trump was taking steps toward banning large institutional investors from buying additional single-family homes. Almost instantly, homebuilding stocks sold off hard. Once XHB broke support, the selling accelerated and the move lower became decisive.
This is why I put so much emphasis on viewing the market through the lens of relative strength and relative weakness. It often reveals what the so-called smart money or large traders are doing well before the headlines appear. Were traders positioning themselves ahead of the news, and did that show up as relative weakness? Or was it all just coincidence? I’ll let you decide.
What I do know is that when I stick to relative strength analysis, I consistently find myself aligned with the right side of the market and days like today only reinforce why I trust this approach.
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