STOCK RALLY FADES -- RISING RATES HURTING HOMEBUILDERS -- BASIC MATERIALS ARE RISING

DOW UNABLE TO SET NEW HIGH... The Dow Industrials made a run at the June 17 intra-day high at 9352. After hitting 9362 earlier in the day, it faded to close up only 33 points at 9233. Chart 1 shows the daily bars. It's normally not a good sign when an index closes in the lower end of its daily range. Chart 2 shows the hourly bars. It shows the failed attempt more clearly and the late-afternoon selloff. This has to be viewed as disappointing action in the face of a barrage of strong economic news released this morning. All of the other major indexes gave up most of their earlier gains as well -- although all still ended in positive territory. All in all, a disappointing finish after a good start. The bottom line is that the market is still stuck in its recent trading range. Long-term interest rates jumped to the highest level in a year. That's taking a toll on homebuilders.

Chart 1

Chart 2

RISING RATES HURTING HOMEBUILDERS... When long-term rates started rising a month ago, I talked about the threat that posed to homebuilders. Charts 3 and 4 tell the story a lot better than I can. Over the past three years, falling rates have been a boon to homebuilders. Now the opposite is true. Rates started rising around the middle of June which coincides exactly with the peak and Centex and other homebuilding stocks. That's why they were among today's biggest losers. Centex fell under its 50-day average a couple of weeks ago and appears headed toward its 200-day average. The drop in housing stocks is the market's way of telling us that rising rates threatens the housing industry. Another potential problem for housing is rising lumber prices and other industrial commodities. That, however, is helping basic material stocks which had another strong day today.

Chart 3

Chart 4

HERCULES JUMPS... I've written recently about the close correlation between rising rates and industrial commodity prices. That's caused buying in basic material stocks tied to those commodity prices. Basic material stocks were strong again today. Hercules was today's top performer. Chart 5 shows the stock climbing to a new 52-week high on rising volume. The weekly version (Chart 6) shows the chemical stock moving up on rising volume. Louisiana Pacific, which is tied to rising lumber prices, also had a strong day today.

Chart 5

Chart 6