FALLING BOND YIELDS BOOST HOMEBUILDERS -- REIT INDEX HITS NEW HIGH

REIT INDEX HITS NEW HIGH... The Dow Jones REIT Index just recently rose above its previous high reached in the spring of 2002. The $DJR bottomed last October along with rest of the market and really started to gain ground during March as the rest of the market turned higher. The green relative strength along the bottom, however, shows that the REIT Index has been relatively flat all year relative to the S&P 500. This week, however, the REIT/S&P 500 ratio line has reached the highest level in twelve months. This suggests that REITs are starting to gain new attention. This could be for a couple of reasons. One is that investors are turning more cautious. REITs are considered to be a defensive group that does better when the rest of the market stalls. Another possibility has to do with the fact the long-term interest rates have been dropping. That may also be giving a boost to homebuilding shares which are very strong today.

Chart 1

BOND YIELD DROP IS HELPING HOMEBUILDERS... Homebuilders are very strong today. Percentage-wise, KBH is the day's strongest performer. Chart 2 shows KBH breaking out to the highest level in 2-1/2 months on rising volume. The relative strength line shows that the stock has been a market laggard since the middle of June when the stock (and the homebuilding group) peaked. The RS line is starting to rise, however, which suggests that the group is now showing new leadership. That's probably due to the drop in bond yields. Chart 3 plots the 10-year T-note yield since the start of the year. It's clear that the long-term rate has been moving in the opposite direction of homebuilders. The jump in yields in mid-June coincided with the homebuilding peak. The drop in yields this month is giving a boost to KBH and the other homebuilders. That may also explain the new interest in REITs. The 10-year T-note yield is now retesting its 200-day moving average. A drop beneath the line could give an even bigger boost to the housing group. I happen to believe that long-term yields have bottomed, which also suggests that homebuilders have probably peaked. Over the short-run however, the trend of yields is down and homebuilders up.

Chart 2

Chart 3