RISING RATES RATTLE STOCKS -- DOW CLOSES UNDER 9,000 -- HOMEBUILDERS ARE SLIPPING
BOND YIELDS JUMP... Within two days after the Fed lowered short-term rates to 1.00%, long-term rates are jumping. I'm sure that's not what the Fed wanted -- nor the stock market. At mid-week, I wrote that a move over 3.50% by the 10-year T-note yield could be troublesome. As Chart 1 shows, it's broken through that level and has risen above its 50-day moving average. That's not good for bonds. It may not be good for stocks either. The last upleg in the stock market started during March as yields were starting back down again. In fact, most of the upside breakouts in the major stock averages took place since May when long rates were plunging. That being the case, I'm concerned that a sudden blip in those same rates could side-track the stock market rally. It certainly won't be good for homebuilding stocks. Chart 2 shows Pulte Corp, which is representative of the homebuilding group, starting to decline. Homebuilding is very sensitive to interest rate direction -- especially long-term rates. The two charts are a mirror image of each other. Pulte turned down on the exact day that long-term rates bottomed. PHM is also threatening its 50-day moving average. If long-term rates keep rising, the uptrend in homebuilding stocks could be in danger.
Chart 1
Chart 2
S&P BREAKOUT MAY RETEST BREAKOUT POINTS... Chart 3 shows recent upside breakout in the S&P 500 Index as it broke through previous resistance points at 965, 954, and 935. It's beginning to look the S&P may retest some of those levels again. That will be an important test. If an upside breakout has staying power, it's important that those broken resistance levels become new support levels. The S&P closed at 976 today. That means that the first level to be tested will be at 965. The second level at 954 coincides with the 50-day average and may be the more important of the two. In our market analysis (and money management work), the 50-day average is a crucial determinant of market direction. That will be an important test for the intermediate advance that started during March. The RSI line is testing the 50-level. Any break of that level would imply more weakness. The MACD lines have turned down as well. Chart 4 shows that the Dow has slipped back below its breakout point at 9,000. Its 13-day Rate of Change (ROC) oscillator has broken a five-month trendline.
Chart 3
Chart 4
BREADTH IS WEAKENING... The NYSE Summation Index is a breadth measure that is based on the advance-decline numbers. [It's a longer range version of the McClellan Oscillator]. The good news is that it's risen to the highest level in three years. The bad news is that it's turned down for the first time since January. The daily RSI line is falling. All of which simply confirms that the short-term trend is weakening. That may be signalling nothing more than a short-term correction. But it does increase the odds for a retest of the recent breakout points on the charts and/or the 50-moving average lines. As far as we can see, the intermediate trend is still up. This week's selling in stocks -- and the uptick in rates -- suggest, however, that the uptrend may be subjected to some testing. Time to be a little more cautious.
Chart 5
