RISING BOND YIELDS ARE MAKING MARKET NERVOUS -- RETAILERS AND UTILITIES BECOME UNDERPERFORMERS -- BED BATH & BEYOND TUMBLES ON BIG VOLUME -- RISING RATES THREATEN ANY HOUSING RECOVERY

BOND YIELDS NEAR 5%... Bond yields reached another nine-month high today. Chart 1 shows the 10-Year T-Note Yield nearing 5%. I suggested last week that bond yields in excess of that level might make stock investors nervous. One sign that the market is taking notice of rising rates is the fact that rate-sensitive stocks are among the weakest market sectors. That includes financials, retailers, REITs, and utilities. Mr. Bernanke's pessimistic comment on housing may be contributing to some stock selling. At the same time, a strong report from the service sector is keeping bond prices under pressure. That's a dangerous combination.

Chart 1

UTILITIES START TO ROLL OVER ... I recently showed that rising bond yields were causing profit-taking in utilities. The change in trend is seen in Chart 2. The Dow Utilities are trading below their 50-day average for the first time since January. Notice the downturn in the relative strength ratio over the last month. A drop in utilities is one of the first signs that rising rates are making some traders nervous. But there are others.

Chart 2

CONSUMER DISCRETIONARY AND FINANCIALS STALL AT OLD HIGH ... Two other underperforming groups that are sensitive to rising rates are financials and consumer discretionary stocks. The latter group includes retailers and homebuilders. Charts 3 and 4 show the Financials SPDR (XLF) and the Consumer Disretionary SPDR (XLY) stalled at their early 2007 highs. Their relative strength ratios have been dropping since the start of the year. Those are early hints that consumer spending is starting to slow and that rising rates are starting to take a toll on the market's optimism. That's especially true of the retail group.

Chart 3

Chart 4

RETAILERS ARE ALSO UNDERPERFORMING ... If consumer spending were starting to dry up either because of rising gasoline prices or the slowdown in housing (or both), one place we would expect to see that would be in the retail sector. Not surprisingly, that's exactly what's happening. Chart 5 shows the S&P Retail Index also stalled below its February high. It's relative strength ratio has been falling since February as well. A lot of the weakness in that group is coming from a weak housing sector. I recently showed a close correction between a weak homebuilding group and the price of Home Depot. Today's example of that linkage is Bed Bath & Beyond.

Chart 5

BED BATH & BEYOND TUMBLES ... The big home furnishing stock plunged over 5% today on huge volume. It gapped below its 200-day moving average and is close to a new low for the year (Chart 6). Its relative strength ratio has already fallen to a new 2007 low. Not surprisingly, the company attributed part of its problems to a weak housing sector. Chart 7 shows that link more convincingly. The weekly bars show the stock for the last four years. The brown solid line is the PHLX Housing Index (HGX). It's no accident that the home furnishing stock peaked in the middle of 2005 just as the homebuilding group did the same (yellow box). That chart seems to suggest that those who claim that weakness in housing isn't effecting other parts of the economy are missing some subtle signs that the market is giving off. If consumer spending is two-thirds of the American economy, relative weakness in retail stocks isn't a good sign.

Chart 6

Chart 7

RISING RATES ARE ESPECIALLY BAD FOR HOUSING ... Those looking for a rebounding housing sector to help the market or the economy might want to look at the next two charts. The daily bars in Chart 8 show the PHLX Housing Index (HGX) starting to weaking after regaining only half of its February/April decline. Even worse is the falling relative strength ratio (solid line) which is much weaker than the price action. That's a sign of relative weakness. The market can't expect much help there. Chart 9 is even more troubing. It compares the HGX (weekly bars) to the 10-Year T-Note Yield (green line) over the last three years. It shows that homebuilders do better when rates are falling (like the second half of last year) and badly when rates are rising (July 2005 to July 2006). The fact that bond yields are rising again is going to push mortage rates higher. That's not good for housing.

Chart 8

Chart 9

TWO LOOKS AT THE S&P 500 ... We've giving two looks at the short-term trend of the S&P 500. The first one shows the S&P to be in overbought territory (RSI line at 70). In addition, the daily MACD lines have yet to confirm the price move to new highs. That's a short-term negative divergence. The fact that the S&P is still in the vicinity of its 2000 high is still of some concern. [Although it's closed at a new record high, it hasn't hit a new intra-day record high as yet]. My favorite chart at moment, however, is the point & figure one in Chart 11. It shows the S&P in a continuing uptrend. A short-term sell signal requires a close at 1505 or lower. Other potential sell signals would occur at closes of 1490 and 1475 or lower. So far, no sell signals have been given since the buy at 1415 during March. But it's good to stay vigilante just in case.

Chart 10

Chart 11