HOUSING STOCKS JUMP ON STRONG HOME SALES -- HOME DEPOT TESTS 2008 HIGH -- EARLY JANUARY EFFECT PUSHES SMALL CAPS TO NEW HIGHS -- ENERGY, BIOTECH, AND REIT ETFS TURN UP -- SEASONAL FACTORS FAVOR STOCKS THROUGH JANUARY -- VIX HITS NEW 2009 LOW
HOMEBUILDER ETF TURNS BACK UP ... Today's report that November existing home sales exceeded expectations is having a bullish on housing stocks. Chart 1 shows the Homebuilders SPDR (XHB) breaking through a three-month down trendline. The ability of the XHB to stay above its 2009 up trendline is another positive sign. The XHB:SPX ratio (below chart) shows that homebuilders are starting to outperform the S&P 500 for the first time since July. Given all of the problems housing has caused for the economy, that's a healthy sign. [It remains to be seen if rising bond yields dampen that enthusiasm in the new year].

Chart 1
HOME DEPOT TESTS 2008 HIGH ... Another good sign for the housing (and retail) group is the strong chart action in Home Depot. The weekly bars in Chart 2 show Home Depot testing its mid-2008 intra-day high at 29.28. A decisive close above that important chart barrier would be a bullish breakout for the stock and would carry a positive message for homebuilders as well. That's because the trend of the big home improvement stock is usually linked to the trend of housing stocks (solid brown line). Home Depot is also one of the biggest holders in Retail Holders (RTH) and the Consumer Discretionary SPDR (XLY). Its fate may help determine there's.

Chart 2
JANUARY EFFECT BOOSTS SMALL CAPS ... According to the Stock Trader's Almanac, the so-called January Effect favors small cap stocks at the end of the old year and the start of the new. According to the Almanac, the January Effect usually starts in December which appears to be the case this year. Chart 3 shows Russell 2000 iShares (IWM) moving to new high ground. The IWM/SPX ratio (below chart) turned up at the start of December which fits the Almanac timetable. The tendency for small stocks to outperform large stocks should carry at least through the month of January.

Chart 3
ETF GAINERS ... While scanning through the various group ETFs, I found the next three charts which are worth keeping an eye on. Chart 4 shows the Energy SPDR (XLE) moving above its 50-day line for the first time in three weeks. Chart 5 shows Biotech iShares (IBB) breaking out to a new three-month high. Chart 6 shows Real Estate iShares (IYR) hitting a new recovery high. All three are also starting to show better relative strength.

Chart 4

Chart 5

Chart 6
SEASONALS LOOK STRONG INTO JANUARY ... The Stock Trader's Almanac identifies the three month span from November through January as the year's strongest period. December is usually the strongest month with a "Santa Claus rally" tucked into the year's last week. There's no guarantee those seasonal trends will work again this year, but they seem to following the Alamanac's script pretty closely. With the Nasdaq having already hit a new yearly high (as well as small caps), odds now favor an upside resolution in the S&P 500. Chart 7 shows the S&P 500 challenging overhead resistance near 1120. I now believe that high will probably be exceeded between now and yearend. Stocks have at least one more month to enjoy their normal seasonal boost. The two moving averages are the 13- and 34-day EMAs which have a great track record tracking market trends. The two have been in positive alignment in the five months since July. The 13-day (blue) line would have to fall below the 34-day (red line) to signal a downside trend reversal. There's little immediate danger of that happening.

Chart 7
VIX HITS NEW 2009 LOW... The last time I wrote about the CBOE Volatility (VIX) Index was in late October when it rose to a four-month high which heightened fears for a market correction. That's because the VIX usually trends in the opposite direction of stocks. The VIX has declined since that October scare, which has supported higher stock prices. Chart 8 shows the VIX trading below 20 today for the first time this year. While it's true that low VIX readings can be a warning that stocks are over-extended, it's the direction of the VIX that's most important. The fact that the VIX is hitting a new yearly low increases the odds for the S&P 500 hitting a new 2009 high.

Chart 8