TELECOMMUNICATION TURNAROUND -- RYLAND LEADS HOMEBUILDERS LOWER AS RATES RISE
WORST SECTOR FOR 2003... I've written recently about sector rotations out of former market leaders into former market laggards. One 2003 lagging sector that appears to be attracting new money is Telecommunations. This was the worst performing sector for 2003. Chart 1, however, shows AMEX Telecom iShares rising to the highest level in six months during December. The relative strength line along the bottom has just started to move up. That's usually a sign that money is finally rotating into the group. Chart 2 puts the recent Telecomm upturn in better perspective. The weekly bars show a potential bottom being formed by the Telecom iShares. The pattern has the look of a bullish "ascending triangle". A decisive close through the flat resistance line would represent a bullish breakout for the ETF. The relative strength line along the bottom of Chart 2 appears to be forming a "double bottom" off its 2002 lows. The simplest way to participate in the potential upturn is to buy the Telecom iShares that trade like a stock on the American Stock Exchange. The three heaviest weighted stocks in this index are Verizon, SBC, and BellSouth.
Chart 1
Chart 2
THREE BIGGEST TELECOMMS... The next three charts show the biggest telecomm stocks in the Telecom iShares. Verizon is bouncing off chart support formed during the spring of 2003. SBC Communications has broken a down trendline and risen to a six-month high. Bellsouth is the strongest of the three and appears to be breaking out to a new 52-week high.
Chart 3
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RYLAND LEAD HOMEBUILDERS LOWER... Homebuilders have shown amazing resiliency over the past three years. That's probably due to the historic drop in long-term rates that started in 2000 that pushed them to the lowest level in forty-five years. Housing stocks are extremely rate sensitive. One of my forecasts for this year is an upturn in long-term rates. If that analysis proves correct and rates do start climbing, homebuilders could be one of the more vulnerable market groups. Today's strong manufacturing report pushed long-term rates sharply higher. Not surprisingly, homebuilders were the day's weakest stock group. Ryland lost 4% and was the group's biggest loser. The daily chart shows that the stock formed three peaks since the start of November. Today's downside selling pushed the stock below its 50-day moving average and puts it in danger of breaking chart support formed over the last two months. The stock also dropped on rising volume which isn't a good sign either. Other homebuilders like Centex and and Pulte lost more than 3%.
Chart 6
WEEKLY RYLAND CHART LOOKS TOPPY... The weekly chart of Ryland isn't very encouraging either. The 14-week RSI line has turned down from overbought territory over 70 after forming a negative divergence from its June high. The weekly MACD lines have turned negative from a double top formation. And, finally, the relative strength line (versus the S&P 500) has started to weaken. That's enough justification to consider some profit-taking in Ryland and the homebuilding group in general.
Chart 7
