BOND YIELD SURGE TO SIX-MONTH HIGHS UNDERMINES MARKET BOUNCE -- ENERGY PRICES SELLOFF ON INVENTORY DATA

NEW SIX MONTH HIGHS ... Long-term interest rates surged today in the T-bond and T-note markets. Charts 1 and 2 show the 10-year T-note (TNX) and the 30-year T-bond yield (TYX) surging to the highest levels in more than six months. This upward trend continues breakouts that took place earlier in the month when yields broke through their 200-day averages and exceeded their August highs. The next upside target for the TNX is its spring high at 4.69% and for the TYX 4.93% (see circles). The weekly bars put the upward trend in bond yields in better perspective.

Chart 1

Chart 2

WEEKLY YIELD CHARTS ... The weekly bars in Chart 3 show that the 10-year T-note yield (TNX) bottomed in the middle of 2003 and has been trading flat since then. The recent upmove suggests that the 10-year yield is headed toward its early 2004 peak at 4.90%. As I've suggested before, however, more convincing evidence that long-term rates have bottomed comes from the 30-Year T-bond yield (TYX). The reason why is shown in Chart 4. The yield on the 30-year bond has been the weakest part of the yield curve. Chart 4 shows, however, that the spring low (second circle) occurred from the same level as the yield trough hit in the spring of 2003. That patterns forms a potential "double bottom" in the long bond yield. That strongly suggests that the period of low long term rates may have finally ended. [I recently suggested that one of the reasons for the upturn in bond yields was a strong Japanese market which hinted that global deflationary forces had given way to new inflationary pressures (September 29, 2005)].

Chart 3

Chart 4

RISING RATES FUND IS A GOOD PLACE TO BE -- THE BOND ETF ISN'T... When bond yields rise, bond prices drop. And bond prices are dropping. The next chart shows the 20-year T-bond iShares (TLT) falling sharply after having broken their 200-day moving average and having completed a "double top" formed from June to September (see circles). Today's price plunge took place on heavy volume. That's not a good sign for the bond market. Back on October 5 I showed a way to benefit from falling bond prices and rising bond yields. Chart 6 shows an updated version of the ProFunds Rising Rates Fund (RRPIX) which I showed in that earlier market message. This chart (plotted through yesterday) has been in an uptrend since early October. It's a mirror image of the Bond ETF in Chart 5. The Rising Rates Fund looks like a better place to be.

Chart 5

Chart 6

RISING RATES ARE BAD FOR HOMEBUILDERS... The market group that's most vulnerable to rising long-term rates is the homebuilders. I've written about this several times in the past, but thought it worth repeating. Homebuilders are the most rate-sensitive stock group in the stock market. They've been market leaders since 2000 when bond yields started their descent to fifty-year lows. They haven't fared as well this year. In fact, they've gone from market leaders to market laggards. The weekly bars in Chart 7 show the PHLX Housing Index (HGX) having broken a yearlong up trendline (they're also trading below their 40-day week average). The HGX/SPX relative strength ratio has also broken a rising support line and is trading at the lowest level in six months. It's no coincidence that homebuilders are hitting six-month lows at the same time that bond yields are hitting six-month highs.

Chart 7

S&P 500 SELLS OFF FROM 200-DAY LINE... The big jump in bond yields short-circuited today's rally attempt. After trading higher in the day, all of the major market indexes closed lower. I've been focusing on the S&P 500 attempt to climb above its 200-day average and its September low at 1201. I've written that the S&P needed a close above 1200 to improve its short-term trend. So far it hasn't been able to do it. The daily bars in the Chart 8 show the S&P failing another attempt to close above its 200-day line. Today's down day also took place on heavier trading. The upside breakout in bond yields may have put the market's rally attempt in jeopardy.

Chart 8

OIL SELLS OFF ON INVENTORY DATA ... Earlier today I wrote that crude oil had probably bottomed at $59 and energy stocks along with it. A report of higher weekly energy inventories late in the day pushed energy prices sharply lower. Crude fell $1.67 to close at 60.77. That still puts it above its recent low at $59. Energy stocks, which had been rallying, gave back all or most of their earlier gains. The Energy SPDR (XLE) backed off from its 50-day average (Chart 9). Oil Service Holders (OIH), which were trading over their 50-day average earlier, closed right at that line (Chart 10). The oil swings didn't matter much to the stock market which appeared more concerned about rising interest rates.

Chart 9

Chart 10