FANNIE MAE AND FREDDIE MAC LEAD FINANCIAL RALLY -- HOMEBUILDERS AND REIT RALLY SUGGEST IMPROVEMENT IN HOUSING -- WAL MART LEADS RETAIL HOLDERS HIGHER -- CSX IS TRANSPORTATION LEADER -- GENERAL ELECTRIC SHOWS NEW LEADERSHIP

MORTGAGE LENDERS LEAD MARKET RALLY ... On Tuesday I wrote about signs of improvement in the stock market and the likelihood for a rally of intermediate proportions. One of the reasons was new signs of relative strength in housing-related areas like homebuilders, retailers, and financial stocks. Here's some more evidence that things are looking better. Shares of Fannie Mae and Freddie Mac are helping lead the market higher today. Why that's impressive is because they are the biggest source of money for U.S. mortgages. Two of the reasons they're rallying are a reduction in their reserve requirements and a brokerage upgrade. But they are rallying. Charts 1 and 2 are essentially alike. Both stocks started tumbling last October when housing problems became more acute. They helped lead the rest of the market lower. Over the last week, however, both mortgage-related stocks have surged through their 50-day averages on rising volume (not shown here). Their relative strength ratios (bottom of charts) have jumped as well. I'm not bold enough to suggest that either stock has hit a final bottom, or that they're in new uptrends. I am suggesting, however, that the recent jump in both stocks tells us that things are improving in the housing and financial sectors.

Chart 1

Chart 2

HOMEBUILDERS ARE BOUNCING ... Another sign of improvement in the housing sector is the recent rebound in homebuilding stocks. Chart 3 shows the S&P Homebuilders ETF (XHB) rising toward a test of its 200-day moving average. Homebuilders are one of the day's strongest groups. That's been the case since the start of the year, as shown by the group's rising relative strength line (bottom of chart). I point this out because homebuilders are a leading indicator of the housing sector. Here again, I can't say for sure that homebuilders have bottomed. But they're bouncing for the first time in nearly a year. On the radio today, an analyst said he saw no signs of improvement in housing. Obviously, he isn't looking at the homebuilders. The reason I mention it is because Wall Street also missed the major peak in homebuilders in the middle of 2005 (Chart 4). If you read back over my Market Messages starting in the summer of 2005, you'll see contant reference to the breadkown in homebuilders as an early warning that the housing boom had peaked. Wall Street ignored the chart signs until it was too late. Wall Street may now be missing signs of an improving housing situation. Chart 4 also shows improvement in the RSI line (top of chart) and weekly MACD lines (bottom of chart) that have turned positive for the first time in two years.

Chart 3

Chart 4

REITS ARE ALSO STAGING A COMBEBACK... Another sign of improvement is coming from Real Estate Investment Trusts (REITs). The weekly bars in Chart 5 show Real Estate iShares (IYR) bouncing from a deeply oversold condition (see RSI line at top of chart). The weekly MACD histogram has also turned positive for the first time in six months (bottom of chart). And, finally, the weekly relative strength line has broken a yearlong down trendline. The daily bars in Chart 6 show the IYR trading over its 50-day moving average. Its daily relative strength line bottomed in January. It seems like everything related to housing and real estate is showing new relative strength. That includes financials and retailers.

Chart 5

Chart 6

WAL MART LEADS RETAIL HOLDERS HIGHER... On Tuesday, I suggested some initial investment in some of the market's strongest groups. One of those groups is retailers. Chart 7 shows why. The Retail Holders are one of the first groups to clear its 50-day moving average. More importantly, its relative strength line (bottom of chart) has turned up sharply. That makes retailers a potential market leader in any upturn. A large part of the reason is Wal Mart. Not only is WMT the biggest weighted stock in the RTH (20%), it's also the strongest. Chart 8 shows the country's biggest retailer breaking out to a new 52-week high today. Its relative strength line has been rising since November. The monthly bars in Chart 9 show WMT trading at a new three-year high and breaking an eight-year resistance line. Its relative strength line has turned up for the first time in five years. That's a pretty impressive combination. A couple of factors working in Wal Mart's favor are that it sells goods at a discount, and many of its goods are economically resistant (like consumer staples).

Chart 7

Chart 8

Chart 9

CSX LEADS TRANSPORTS HIGHER... Another leadership group that I've highlighted is the transports. The rising relative strength line below Chart 10 shows why. The Dow Transports are also moving up to challenge their 200-day average. The top performing transportation stock is CSX. Chart 11 shows the rail stock having broken out to a new record high. Its relative strength line has done the same. If you're thinking of buying into a leading group, it's usually a good idea to buy one of its leaders.

Chart 10

Chart 11

GENERAL ELECTRIC SHOWS NEW LEADERSHIP... The daily bars in Chart 12 show General Electric surging over 5% today (courtesy of a braokerage upgrade), which has pushed it above its 200-day moving average. Even more impressive is the jump in its relative strength line (below Chart 12). Leadership by this General is something new. Chart 13 is a ten-year chart of the GE/SPX ratio. It shows that GE had been a market laggard since 2001. This week's price surge, however, has pushed its weekly relative strength line to the highest level in three years. That's the first real sign of leadership in General Electric in eight years.

Chart 12

Chart 13

GOLD/STOCK RATIO FALLS... I also suggested on Tuesday that any upturn in stocks (which would probably coincide with a bounce in the dollar) could cause profit-taking in an overbought commodity sector. Chart 14 is a ratio of the Gold ETF (GLD) divided by the S&P 500. The rising ratio has favored gold (and other commodities) over stocks since last summer. The breaking of the rising trendline, however, shows that the short-term pendulum has swung away from gold and back to stocks.

Chart 14