HOUSING STOCKS FALL AS BOND YIELDS JUMP -- S&P 500 SLIPS BELOW 50-DAY AVERAGE
HOMEBUILDERS DRAG MARKET DOWN ... A weaker-than-expected report on home sales for the month of December is causing heavy selling in homebuilding stocks. That in turn is helping to pull down the rest of the market which is in a weak technical condition to begin with. From a charting standpoint, the selling of homebuilders isn't new. Chart 1 shows that the PHLX Housing Index (HGX) peaked during July and has been underperforming the broader market since then. The underperformance is shown by the solid line in Chart 1 which is a ratio of the HGX divided by the S&P 500. The ratio has been falling for the last six months which means that housing stocks have gone from market leaders to market laggards. Notice also that the ratio line has been much weaker than the HGX during the recent rally attempt. That's a sign of underlying weakness. It's a well known fact that a strong housing sector has been a big plus for consumer spending over the last five years. If housing has peaked (which I suspect it has), that's going to remove a big bullish prop from under the stock market.
Chart 1
BOND YIELDS ARE CLIMBING... Part of the selling in housing stocks today may also be related to a jump in bond yields. Housing stocks are extremely sensitive to any hint of rising long-term yields which determine the direction of mortgage rates. Chart 2 shows the 10-Year T-Note Yield (TNX) trading over its 50-day moving average after having bounced off its 200-day line. Today's bond selling is apparently tied to a disappointing auction of two-year notes. Whatever the reason, rising rates aren't good for housing stocks or the stock market.
Chart 2
UTILITIES ARE TIED TO ENERGY ... Utilities are one of the day's weakest sectors. I suspect there are two reasons for that. One is that utilities are rate-sensitive stocks. They often come under pressure when bond yields jump as they're doing today. Chart 3 shows the Utilities Sector SPDR (XLU) meeting with selling just below their early October peak. The second reason has to do with energy. If you compare Charts 3 and 4, you'll see that there's been a fairly close link between energy and utility stocks over the last five months. They peaked together in early October, bottomed together in late October, and are both under heavy selling pressure today. [The day's utility losses are second only to energy which is the day's weakest group]. Part of the reason for their linkage is due to the fact that rates charged by some electric utilities are tied to the direction of energy prices. Another more direct reason is due to the fact that the utility group includes a number of natural gas companies that are directly tied to energy prices. [Natural gas stocks are down 2.8% today which is second only to a 3.3% drop in oil service stocks].
Chart 3
Chart 4
S&P 500 SLIPS UNDER 50-DAY LINE ... With the Dow and the Nasdaq 100 trading below their 50-day averages, I wrote yesterday that I doubted the S&P 500 would stay over that support line for long. Chart 5 shows the S&P trading below that line in late afternoon trading. Needless to say, a close below the 50-day line (currently at 1263) would be another sell signal for the market. In that case, the next downside target would be the early January low at 1245. The green bars overlaid on the price chart are MACD histogram bars. The histogram bars fell below the zero line last week and are now at the lowest level in more than three months. That's a leading indicator of short-term price direction which appears to be down.
Chart 5
