LONG-TERM RATES ARE TESTING 4.00% LEVEL -- HOLDERS OF REITS AND HOUSING STOCKS MIGHT WANT TO PAY CLOSE ATTENTION

10-YEAR T-NOTE TESTS FEBRUARY LOW ... After spiking higher from mid-February to mid-March, long-term rates have been dropping. No one is sure exactly why they've been dropping, but they have. Chart 1 shows, however, that the yield on the 10-year T-note (TNX) has reached an important chart point. The TNX is re-testing the low hit earlier this year at the 4.00% level. Not surprisingly, bond yields are bouncing a bit today as some traders take some profits on their long bond positions. A bigger question is whether or not bond yields find a floor near that 4.00% level. If they do, and if bond yields start to rise, that could have a negative impact on rate-sensitive stock groups. One area that's especially sensitive to trends in bond yields is housing. That includes homebuilding stocks and REITS. Both groups have thrived on falling bond yields. That's why it's a good idea for stock holders in those groups to watch bond yields very closely at this point.

Chart 1

REIT RALLY BEGAN IN 2000... The next chart compares the Morgan Stanley REIT Index (bars) to the yield on the 10-year T-note (solid line). The chart shows that the major bull market in REITs began in 2000 as bond yields were starting their major descent to 50-year lows. [The collapse in the stock market the same year also pushed money into REITs]. In my view, what has prolonged the real estate (and housing) bull market has been the unusually low level of bond yields which have stayed low despite an economic recovery and a tightening cycle by the Fed. The recent rally to record highs by REITs has coincided with the recent slide in yields. That's why the current test of 4.00% by bond yields is so important.

Chart 2

REITS HIT NEW HIGHS ON FALLING RATES... Chart 3 compares the REIT Index to the TNX over the last eighteen months. Notice that the major REIT upturn in May of last year coincided with a peak in yields. The upturn in yields from the 4% level that lasted until March of this year led to a REIT correction. The March peak in yields pushed the REIT Index to a new high. All I'm suggesting here is that the REIT breakout may be in jeopardy if bond yields start to bounce from that 4% level again.

Chart 3

REIT ETF IS OVERBOUGHT ... The next chart shows the Cohen & Steers REIT ETF (ICF) to be in a short-term overbought condition after recently moving into new high ground. Yesterday's profit-taking came on unusually high volume (which was probably the result of a brokerage REIT downgrade). Nonetheless, the group looks vulnerable purely on technical grounds. The fact that bond yields have reached a potential "floor" may also increase the risk in real estate stocks.

Chart 4

HOUSING INDEX IS OVERBOUGHT ... Housing stocks are also heavily influenced by the direction of bond yields. Chart 5 shows that the drop in housing stocks in March followed a rebound in bond yields a month earlier. The drop in yields starting in early April no doubt contributed to the recent housing bounce. Which brings us back to the 4% level. The yield on the 10-year T-note has reached the same level where that earlier bounce began. If another bounce starts, that could cause some selling in housing stocks. Their 9-day RSI line shows the housing group to be in an overbought condition at present. That's another reason why holders of those stocks should start monitoring bond yields especially closely as they test the 4% level.

Chart 5