BANKS AND HOMEBUILDERS ARE CLOSELY LINKED -- AND BOTH ARE WEIGHING ON THE REST OF THE MARKET -- HOMEBUILDERS BOUNCE BUT REMAIN IN MAJOR DOWNTRENDS -- NEWMONT MINING AND ROYAL GOLD ARE DAY'S GOLD LEADERS
BANKS AND HOUSING ARE LINKED ... Since banks and homebuilders have been the weakest parts of the market, I decided to take a closer look at how closely they're linked. The answer is "very". Chart 1 compares the PHLX Housing Index (bars) to the PHLX Banking Index (green line) over the last three years. The correlation is remarkable. The 50-week correlation coefficient below the chart bars puts that correlation at .94 which is "very" high. Of course, that makes sense. Banks are closely tied to the fate of the housing and mortgage market. So it shouldn't be a surprise to see how closely they depend on each other. Unfortunately, both are acting as a drag on the rest of the market.
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Chart 1
BANKS AND BUILDERS WEIGH ON MARKET... Chart 2 compares banks (red line) and homebuilders (blue line) to the S&P 500 (black line) over the last three years. You can see that they generally trend in the same direction, but not at the same rate. Banks and builders actually helped lead the market higher at the 2009 bottom. That upside leadership lasted until spring 2010. Their late 2010-early 2011 rally helped push the S&P 500 to a new recovery high. They started dropping during April, however, and have been a big drag on the market since then. Chart 2 shows both groups undercutting their 2010 lows which no doubt contributed to this summer plunge in the S&P 500.
Chart 2
NO LEADERSHIP YET ... Charts 3 and 4 show very similar chart patterns for the DJ US Home Construction ETF (ITB) and the Financials SPDR (XLF). Both are trading at the lowest levels since mid-2009. Their bear trend is confirmed by the fact that their 10-week EMAs are trading well below their 40-week EMAs. Their relative strength lines (solid lines) are still dropping. It seems unlikely that the stock market will be able to reverse its current bear trend until it gets more help from banks and builders. So far, there's not a lot of evidence of that happening.
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Chart 3
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Chart 4
HOMEBUILDING LEADERS HAVE A LONG WAY TO GO ... Today's report showing some stabilizing of home prices in the U.S. has put a bid under homebuilders. PulteGroup (PHM) is one of the S&P 500's strongest gainers today (+6%). Horton's (DHI) gain of 2% makes it another market leader. Their chart patterns, however, show that both stocks have a long way to go to reverse their major downtrend. PHM is rebounding from the lowest level in a decade and is in an oversold condition. There's a lot of overhead resistance, however, along reaction lows ranging from 6.13 to 6.79. Upside volume, however, does suggest that some new money is coming back into the stock. Chart 5 shows Horton in a stronger position. But it too is nearing formidable overhead resistance starting around 11. I suspect that the market is benefiting from today's buying in both stocks. Unfortunately, their individual charts don't appear to show much upside potential.
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Chart 5
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Chart 6
WEAK FINANCIAL LEADERS ... Bank of America (BAC) has been one of this week's upside financial leaders. Unfortunately, it remains in a major downtrend (Chart 7). The first thing it needs to do is overcome its (blue) 50-day moving average. It's still a long way below heavier overhead resistance around 11. Wells Fargo (WFC) has one of the better bank patterns, mainly because it's managed to hold above its lows of last year near 23 (Chart 8). But the stock remains well below overhead resistance barriers starting near 26. It's hard to imagine either stock providing much upside leadership to the broader market. In fact, financials are the day's weakest sector.
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Chart 7
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Chart 8
GOLD LEADERS... Gold stocks continue to attract new buying. Two of the day's mining leaders are shown below. Chart 9 shows Newmont Mining (NEM) nearing a challenge of its 2010 highs. It recently broke through resistance around 60 and shows good relative strength. Royal Gold (RGLD) has already reached a new record (Chart 10). A statement by a voting Fed governor hinting at more Fed "accomodation" has put a bid under gold and silver. That suggests that investors are suspicious of the strength behind the current stock market bounce (as am I).
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Chart 9
