HOUSING AND FINANCIAL PROBLEMS TAKE CENTER STAGE -- EURO HITS NEW RECORD AGAINST THE DOLLAR -- MARKET INDEXES PULL BACK FROM TOP OF RECENT TRADING RANGE

EURO HITS NEW RECORD VERSUS THE DOLLAR ... A sharp drop in U.S. bond yields today is causing heavy selling of the U.S. Dollar. Most of the major foreign currencies are gaining ground (including the yen). The most notable move, however, is in the Euro. The daily bars in Chart 1 show the Euro rising above its April high to break the 137 barrier. The monthly bars in Chart 2 show that today's move over 137 pushes the Euro through its early 2005 high (at 136.59) to a new record high. That should be bullish for gold and gold shares and commodities in general. Most commodities are trading higher today. The Reuters/CRB Commodity Index is trading at a new seven-month high. The only stock groups gaining ground are gold and energy shares. Most of the selling is being seen in financials, housing, and retailers. That explains why bond yields and the dollar are dropping in the first place because it hints at economic weakness.

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NO SIGN OF A BOTTOM IN HOUSING... Yesterday I wrote about the positive aspects of buying in the technology sector and the support that was bringing to the overall market. At the same time, the market has to contend with ongoing problems in the financial and housing areas. DR Horton reported today that it saw no sign of a housing recovery. As a result, homebuilding stocks are among the day's weakest stocks. Chart 3 shows Horton (DHI) very close to a new three-year low. It's also in danger of breaking a "neckline" drawn under its 2004-2006 lows. Chart 4 shows the Homebuilders SPDR (XHB) falling more than 2% today and headed for a test of the lows of last summer. Its relative strength line is doing the same. That's also weighing on financial shares tied to housing and subprime mortages as well as retail stocks.

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FINANCIALS TRADE BELOW 200-DAY AVERAGE... Next to housing, financial stocks are coming under the most pressure today. Chart 5 shows the Financials SPDR (XLF) trading back below its 200-day moving average. The noticeable pickup in trading activity over the last month isn't a good sign either. The negative combination of falling prices and rising volume is seen more graphically in the On Balance Volume (OBV) line at the bottom of Chart 5. That line has already broken its March low. [OBV is a running cumulative total of volume on up days versus volume on down days. A falling OBV line means that there's more downside than upside volume]. One of the hardest hit financial stocks is Lehman Brothers Holdings. Chart 6 shows that stock falling 3% today and undercutting a rising trendline drawn under its April/June lows. Some other big financial losers are Countrywide Financial and Avalonbay Communities.

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RETAILERS CONTINUE TO UNDERPERFORM ... Whenever homebuilders come under pressure, that spills over to retailers. I've suggested in past articles that relative weakness in retailers was an early sign that housing and subprime mortgage concerns were starting to take a toll on consumer confidence. The gradual deterioration in retail stocks is documented in Chart 7, which shows the S&P Retail Index (RLX) falling 2% today and bearing down on its 200-day line. The relative weakness in retail stocks is shown more dramatically in the falling RLX/SPX ratio beneath Chart 7. The biggest retail casualty is Sears Holdings which is dropping 10% today on huge volume. Chart 8 shows the technical damage being down to that retail loser.

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TUG OF WAR CONTINUES ... I may have jumped the gun yesterday in declaring that rising technology stocks were winning the battle with falling financial shares. At least that's not the case today. No serious chart damage is being done to the major stock indexes. However, today's selling is occurring near the top of recent trading ranges. Chart 9 shows the Dow Industrials trading 100 points lower in afternoon trading. Although its trend is still up, the 14-day RSI and the 12-day Rate of Change (ROC) lines show a lack of upside momentum. That may be enough to keep prices locked in the month-long trading range. No clearcut signal will be given, however, until the Dow (and the S&P 500) break decisively into new highs or fall below their June lows. The hourly bars in Chart 10 show the Dow's trading range more clearly. The tug of war between rising technology shares and falling financials continues.

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