JUMP IN BOND YIELDS CONTRIBUTES TO AFTERNOON SELLOFF -- HOMEBUILDERS DROP -- QQQ BACKS OFF FROM RESISTANCE -- MARKET AWAITS THE FED

INFLATION REPORT PUSHES YIELDS HIGHER... The market got an early boost today from Iraq and falling oil prices. By the end of the day, however, concern about rising rates pushed the major stock averages into negative territory. A big jump in consumer spending combined with a higher-than-expected inflation number pushed bond yields into the biggest gain since May. Chart 1 shows the 10-year T-note yield bouncing off its 50-day average to end at 4.74%. The jump in yields served to remind investors that the Fed starts its two-day meeting tomorrow. Homebuilders were hit especially hard today as a result. Airline stocks gave back most of their early gains, but still finished higher. Tobacco stocks bounced.

Chart 1

PULTE SELLS OFF ON VOLUME... Homebuilding stocks are being negatively effected by rising interest rates. Since long-term rates started climbing in early April, homebuilders have been underachievers. The chart of Pulte shows a peak forming during March. The price and relative strength lines, however, started dropping in early April when rates started to rise. The stock fell heavily again today on rising volume. In case anyone still doesn't know it, rising rates are negative for the housing sector and homebuilding stocks in particular.

Chart 2

NASDAQ 100 BACKS OFF FROM APRIL HIGH ... The Nasdaq 100 Shares (QQQ) helped lead today's late retreat. Part of the reason may be the fact that it had reached potential chart resistance at its April peak at 37.50. I said last week that I thought that level would be broken eventually. It's not unsual, however, to see some profit-taking develop first. The real key to the market will be how it reacts to the Fed decision on Wednesday. My analysis suggests that the market will probably climb after that into a traditional summer rally.

Chart 3