HOMEBUILDERS PULL MARKET LOWER -- GOLD AND ENERGY SELLING ALSO WEAKENS MARKET

HOUSING INDEX BREAKS 200-DAY LINE ... A bad earnings report from Toll Brothers (which hit a new 52-week low) made a bad situation worse for the homebuilding group. The five homebuilders in the S&P 500 suffered losses averaging 3.5% on the day. Each of the stocks are trading below their 200-day moving average -- as is the Housing Index itself. Chart 1 shows that the PHLX Housing Index (HGX), which peaked over the summer, has broken its 200-day line for the first time in nearly three months and appears to be starting another downleg. The impact that's having on the rest of the market can be seen in its relative strength ratio. That line also peaked last summer and appears headed back to its late 2005 low. That means that housing stocks are now helping to pull the rest of the market down with it. The HGX/SPX ratio in Chart 2 shows that it's in danger of breaking a three-year up trendline. A break of that line would be bad for both. That's because the housing sector has been a big support for the rest of the economy. It's now threatening to become a big drag.

Chart 1

Chart 2

BOND YIELDS ARE RISING ... Part of the selling in housing is probably coming from the recent upturn in long-term bond yields. Chart 3 shows the 10-year T-note yield trading near a three-month high and trading well over its 50-day moving average. Chart 4 shows the 30-year T-bond yield also starting to climb but not as much. Part of the reason for that is Thursday's first auction of the 30-year bond in nearly four years. Demand for the revived long bond has boosted its price and kept its yield lower.

Chart 3

Chart 4

WHY COMMODITY SELLOFF RAISES MARKET RISK ... Commodity-related stocks -- gold, energy, and basic materials -- were the biggest losers in the market today. [Please see my earlier messages suggesting short-term profit-taking in gold and energy shares]. Although that may seem like good news for the market, it really isn't. In fact, it raises the risk level for the market. That's because commodity stocks have been the market's biggest winners. When they start to fall, the market loses bullish support. At least until they start to stabilize again, or some other group starts to turn up. That didn't happen today. Everything fell. Defensive groups like consumer staples and healthcare held up a bit better than most. But even they ended in the red. That pushed the S&P 500 Index to its lowest 2006 close. A test of 1245 appears more likely (see circle).

Chart 5