LONG-TERM RATES SPIKE -- STOCK RALLY IS STALLING -- HOMEBUILDERS SELLOFF
MARKETS DON'T BUY FED JAWBONING... It seems Mr. Greenspan has lost respect for the markets -- and the intelligence of its participants. In today's testimony, he promised to keep interest rates down to promote an economic recovery that he saw accelerating. He also said that "substantial further conventional easings could be implemented" if needed. Apparently, no one in the bond market believed him. Who can blame them? How can there be "substantial" room for easing with a Fed fund rate at 1%. Short-term rates can't go below zero. He can't expect long-term rates to stay down if he's also predicting a strong economic rebound. There again, he's jawboning in the wind. Long-term rates spiked after the last quarter point cut. They spiked even more today. The Fed can't directly control the direction of long-term rates. They can only do that by jawboning. That's not working anymore.
LONG-TERM RATES SPIKE OVER 200-DAY LINE... Earlier today, we showed the yield on the 10-year T-note spiking over its 200-day moving average. This evening, we're showing the weekly chart. It shows the 10-year yield closing over its 40-week average for the first time in more than a year. A little over a month ago, the yield was near 3%. Now, it's about to hit 4%. That's a huge move in the short period of a month. The weekly RSI and MACD lines recently flashed a "positive divergence" by not following yields into new lows. The weekly RSI has now moved over 50, which means that momentum in yields has shifted to the uspide. The weekly MACD lines are also positive. Chart indications are that yields have probably seen their lows. That's bad for bond prices, which tumbled today. It's also bad for a budding economic revival. Today's spike may also be injecting more caution into a stock market rally that's based on an economic recovery. Some interest-sensitive groups like utilities are weakening again. The Dow Utilities have fallen under their 50-day average. Higher rates pushed the dollar higher today, which caused heavy selling in gold and gold shares. The XAU index also broke its 50-day average today and its late June low. Homebuilding shares are also getting hurt by rising rates.
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HOMEBUILDERS FALL ON RISING RATES... The housing industry has thrived on falling rates. The bad news is it's especially vulnerable to the threat of rising rates. It's no surprise then to see homebuilders getting sold today on heavy volume as long-term rates spiked. [Mortage rates are based on the direction of the 10-year yield]. All three homebuilders shown below fell on very heavy volume. Two of the three are already trading under their 50-day averages. Housing has been one of the few bright spots in a weak economy. That's one of the reasons the Fed wants to keep long-term rates down, so as not to threaten housing. The danger is that rising rates could damage the housing sector before the economy is able to gain traction. That could be a bad situation. I've said before that rising rates could be a mixed blessing for stocks. Money coming out of bonds has to go somewhere -- most likely stocks. Today's selling in the stock market, however, implies that soaring rates might be causing some nervous selling in stocks as well. If you haven't already done so, please take a look at "John's Latest Performance Chart" from our menu. You'll see the strong inverse correlation between Centex and the 10-year yield. Since rates have been falling, that's helped the stock. Rising rates won't.
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DOW RALLY STILL STALLED... At the end of last week, I expressed concern about the inability of the large cap stock averages to hit new highs and confirm upside breakouts in small-caps and the Nasdaq. Unfortunately, that divergence still hasn't been resolved. The next chart shows the Dow failing twice to get above the 9250 level. The daily MACD lines are still negative. It may have to retest the lower end of its recent range and its 50-day moving average. With earning's season upon us, there's a lot of big expectations built into the recent stock market rally.
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HEALTHCARE LEADER... Hospital-related stocks bucked the market's trend today. The standout performer is shown below. HMA broke out to a three-month on very strong volume. It's nearing a test of its April high at 20. A close through that chart barrier would be even more bullish.
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