REITS AND HOMEBUILDERS FALL BELOW 200-DAY LINES AS BOND YIELDS BREAKOUT
BOND YIELDS EXCEED AUGUST HIGH... Yields on the 10-year T-note and the 30-Year T-bond closed over their August highs today. I've explained before that I'm focusing more on the 30-year bond because I believe that's where the most reliable trend signals are being given for the direction of long-term bond prices and yields. Chart 1 shows the 30-Year T-Bond yield (TYX) breaking through the August barrier to reach the highest level in nearly five months. The TYX has been trading over its 200-day average for more than a week. Chart 2 shows that the TYX has also broken a down trendline starting in the middle of last year. I believe that the recent upturn in long-term rates is one of the main reasons that stock prices have started to drop (along with loss of leadership from energy shares). One of the reasons that I believe that the market is taking the rise in bond yields seriously is the recent breakdown in homebuilders and REITS.
Chart 1
Chart 2
HOUSING STOCKS TUMBLE ... Chart 3 shows the fall from grace that's taken place in the PHLX Housing Index (HGX) over the last two months. The HGX has fallen under its 200-day average for the first time in a year. Its relative strength ratio also shows its loss of market leadership since August. Since housing is such a rate-sensitive group, it's no coincidence that the HGX fell below its 200-day line at the same time that the 30-year T-bond yield shown in Chart 1 rose above its 200-day line. The two are clearly linked. Rising bond yields are bad for housing stocks and also for REITs.
Chart 3
REAL ESTATE ISHARES FALL HARD ... The chart picture isn't any better for the REIT group. Chart 4 shows the Real Estate IShares (IYR) falling below their 200-day line today. That's the first time that's happened in more than a year. And they did so on rising volume. That's a bearish combination. The relative strength ratio for the IYR peaked in early August along with the homebuilders. When two groups like homebuilders and REITs that have benefited so handsomely from historically low bond yields start to fall so badly, that tells me that the market is taking the recent upturn in bond yields very seriously. And it doesn't like it.
Chart 4
T-BOND ISHARES BREAK SUPPORT... The last time I wrote about the T-Bond 20 Year iShares (TLT) I was concerned about a "double top" formation on its daily price chart (see circles). At the time the price of the TLT had fallen to its August low (90.96) and was also threatening its (red) 200-day moving average. With the 30-year T-bond yield breaking its August high today, the price of the T-Bond iShares (which trend in the opposite direction of yields) broke its August low. It also closed beneath its 200-day moving average for the first time this year. And it did so on rising volume. Unless something happens over the next two days to turn things around, the bond market will give its first important sell signal in a long time. What's especially troublesome is that bonds and stocks are giving sell signals at the same time. That doesn't give investors a lot of choices on the long side of either market. But there's a way to profit from rising rates.
Chart 5
PROFUNDS RISING RATES FUND... On October 5 I wrote a piece on how to profit from rising rates by using the ProFunds Rising Rates Fund (RRPIX). The chart of that fund is plotted below (through yesterday) and shows it testing its August high and its 200-day moving average. I suspect it broke through both barriers today. This inverse bond fund is one way to hedge your bond portfolio against losses if bond yields continue to rise or to actually profit from rising rates. [Please see my message posted earlier today on bear market stock funds. ProFunds also offers a wide selection of bear funds to choose from if you're so inclined].
Chart 6
