WEAK HOUSING DATA WEIGHS ON REITS AND HOMEBUILDERS -- FALLING RATES HURT DOLLAR AND HELP COMMODITIES -- AAPLE AND EBAY KEEP NASDAQ OVER ITS 50-DAY LINE -- ABBOTT LABS AND GOODYEAR TIRE & RUBBER LEAD S&P 500 HIGHER

HOMEBUILDERS WEAKEN ... Anything tied to housing or real estate was sold today. The reason is the report that new home sales fell "unexpectedly" in February by 3.9% to the lowest level in nearly seven years. At the same time, inventories rose 1.6% to the highest level in sixteen years. While that report caused some early selling in the stock market, homebuilders and REITs were especially weak. Chart 1 shows the PHLX Housing Index trading down today. I pointed out last week that the HGX was testing important long-term support at its 200-day moving average. It may now retest that support line. The solid line in Chart 1 is the HGX/SPX ratio. After weakening for nearly two years, the ratio bounced from November to the end of January and helped support a market rally. The ratio started dropping in early February, however, and is now at a new four-month low. Part of the recent drop comes from subprime mortgage concerns and the resulting tightening of credit standards by home lenders. People can't buy homes if it's harder to obtain a mortgage. Needless to say, continuing weakness in housing is a potential negative for the stock market and the economy. Several individual homebuilders have already fallen below their 200-day lines, including DR Horton (Chart 2) and Centex (Chart 3). Centex is dangerously close to a new 52-week low. REITs weakened as well.

Chart 1

Chart 2

Chart 3

REITS CONTINUE TO WEAKEN ... Each time I've shown a REIT ETF over the last month, I've commented on the negative combination of price and volume action. That was especially true when REIT prices started to fall in early and late February (red circles). The REIT ETF shown in Chart 5 is down 1.48% today on rising volume. The two converging trendlines that contain the March price rebound have the look of a "bear flag" or an "ascending wedge". Both are bearish patterns. A closing violation of the lower line would suggest the likelihood of another downleg in the REIT group. The REIT/SPX ratio also peaked in early February and has now fallen to a nearly three month low. That's the first time in a long time that REITs have underperformed the rest of the market.

Chart 4

NASDAQ HOLDS ABOVE ITS 50-DAY AVERAGE ... By the end of the day, the market had pretty much shrugged off the selling in housing and real estate. One of the reasons for that was a late rally in the technology-dominated Nasdaq market. Chart 5 shows the Nasdaq 100 Shares (QQQQ) overcoming early weakness to close up on the day -- and on rising volume. That kept it (and the Nasdaq Composite) above its 50-day moving average. A lot of that buying can be attributed to two stocks. Chart 6 shows EBAY climbing 1.4% on rising volume to reach a new high for the month. Chart 7 shows Apple climbing more than 2% and nearing a test of its January high. [Dell and Juniper Network also gave a boost to the Nasdaq]. Commodity-related stocks had another strong day.

Chart 5

Chart 6

Chart 7

FALLING BOND YIELDS HELP COMMODITIES ... The next three charts show how housing problems are giving a boost to commodities and their related stocks. Chart 8 shows the 10-Year Treasury Note dropping again today. {The 10-Year yield is now higher than the 2-year for the first time in several months]. That's likely due to weakness in the housing sector (since it increases the odds for Fed easing). Lower U.S. rates push the U.S. Dollar lower and foreign currencies higher. Chart 9 shows the Euro trading close to a new 2007 high today. A rising Euro is usually associated with rising commodity prices. Most commodity prices did rise today. Chart 10 shows the DB Commodities Tracking Index Fund (DBC) continuing to rally. In addition to energy and precious metal stocks gaining today, basic materials were especially strong. That group was led by Freeport McMoran Copper & Gold which is trading at a new 10-month high. Its relative strength ratio is doing the same (Chart 11).

Chart 8

Chart 9

Chart 10

Chart 11

ABBOT LABS SOARS TO NEW RECORD ... Abbott Labs got some good news today that was enough to push it 6.2% higher (on massive volume), and made it the day's top percentage gainer in the S&P 500. The monthly bars in Chart 12 show the healthcare leader having broken through its early 2002 highs to reach a new record. Upside volume has been impressive during the first quarter. Its relative strength ratio (top of chart) is also rising after several years of underperformance. We've seen that same pattern in other traditionally defensive stocks. [Abbott's good news pushed Boston Scientific down 6% to the lowest level in nearly five years]. The S&P 500 also got a big boost from Goodyear Tire & Rubber, which rose 4.8%. Chart 13 shows GT trading over 30 for the first time in six years. Its RS line (solid line) is keeping pace. Those two stocks helped the S&P 500 end the day on top of its 50-day moving average, thereby keeping last week's Fed-inspired bounce intact.

Chart 12

Chart 13