BONDS AND STOCKS ARE DISAPPOINTED WITH FED'S QUARTER POINT CUT -- HOMEBUILDERS DON'T LIKE HIGHER RATES
BOND YIELDS JUMP SHARPLY... The Fed cut the Fed funds rate a quarter point today to l.00%. That's the lowest level in 45 years. [The Fed fund rate stood at 6.50% in January 2001 when the Fed started cutting]. Even so, the bond and stock markets were hoping for more. When they didn't get it, both sold off. Prices of T-notes and T-bonds fell over a full point. As a result, their yields jumped sharply. Chart 1 shows the yield on the 10-year T-note jumping 96 points to close at 33.61. The plunge in 10-year yields since early May was predicated on the Fed taking a more aggressive stand on deflation. Apparently, bond bulls didn't feel that today's Fed cut was aggressive enough. Stock traders felt the same way.
Chart 1
NASDAQ TESTING 1600... The Nasdaq market lost only 3 points today -- and that on light volume. And there were more Nasdaq advancers than decliners. The same is true on the big board. Part of the reason for that is that small and midsize actually closed higher. The Dow lost 98 points. The Dow also fell beneath its 20-day average for the first time in five weeks. Here again, volume was light. The Dow is also retesting psychological support at 9,000. A close beneath that level might cause enough selling to push it back toward its lower Bollinger Band and its 50-day moving average. The same may be true for the Nasdaq market. If that happens, the ability to stay above their 50-day moving averages will be crucial. In other intermarket developments, the dollar weakened and commodities strengthened. Gold climbed almost $3.00; oil jumped over a dollar. As a result, gold and oil stocks gained some ground today. The big jump in oil may also explain the relative weakness in transportation stocks.
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HOMEBUILDERS DON'T LIKE HIGHER RATES.... Perhaps the most interest rate sensitive part of the market are homebuilders. Plunging long-term rates since 2000 have kept a fire under homebuilding stocks. With their stocks have risen so high, any hint of higher long-term rates could cause nervous selling. Charts 4 and 5 compare Centex to the yield on the 10-year note. You'll see that they're a mirror image of each other. Centex surged during May as rates fell. Centex started weakening seven days ago -- exactly when long rates started bouncing. So far, there's no serious damage being done to either market. However, a move by the 10-year yield over 3.50% would be a bad sign for both bonds and the homebuilders.
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