HOMEBUILDERS HAVE A STRONG WEEK -- LENNAR GAPS HIGHER -- BEAZER HOMES AND KB HOME ALSO HAVE A STRONG WEEK -- RISING BOND YIELDS CONTINUE TO HELP BANKS AND INSURERS WHILE HURTING UTILITIES AND REITS
HOMEBUILDERS HAVE A STRONG WEEK... The daily bars in Chart 1 show the Dow Jones U.S. Home Construction iShares (ITB) ending the week at the highest level in two months. Interestingly, that came in the face of rising bond yields. Earlier in the year, rising bond yields appeared to push homebuilders lower, since that suggested rising mortgage rates. This week's strong homebuilding news may have actually contributed to higher bond yields which hit a two-month high (top of chart). The strongest home sales in seven years is good for the economy which is bad for bond prices. I also suspect a change in psychology is taking place regarding housing. Over the past few years, a "deflation" psychology favored waiting for lower home prices and/or lower bond yields. The recent surge in bond yields, however, (and rising home prices) may be giving way to an "inflation" psychology which favors buying now before home prices and bond yields go much higher. A strong quarterly report from Lennar also sparked buying of homebuilders.

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Chart 1
LENNAR GAPS HIGHER ON STRONG EARNINGS... Chart 2 shows Lennar (LEN) gapping higher at midweek on a very strong quarterly report. That price jump also pushed the country's second largest homebuilder through its May peak near 50. And it did so on rising volume. Its relative strength ratio (top of chart) also jumped to a two-month high. The monthly bars in Chart 3 show Lennar nearing the highest level in nine years which would also put it above its 2007 peak. The LEN/ITB ratio (solid line) also shows Lennar to be a leader in the homebuilding group. That a good thing since Lennar is the second biggest holding in the ITB.

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Chart 2

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Chart 3
BEAZER AND KBH PLAY CATCH UP ... Two smaller homebuilders, that had been lagging behind the group, had a surprisingly strong week. Chart 4 shows Beazer Homes (BZH) exceeding its January high to reach the highest level in a year. And it so on rising volume. The BZH/ITB ratio (top of chart) shows the stock starting to outperform the group for the first time in eighteen months. Beazer's weekly gain of 9.5% made it the week's strongest homebuilder (just ahead of Lennar's gain of 8.3%). KB Home's weekly gain of 5.8% made it another homebuilding leader. Chart 5 shows KB Home (KBH) surging to a new 2015 high (on rising volume). The stock has also broken a falling resistance line extending back to spring 2014. The KBH/ITB relative strength ratio (top of chart) also shows the stock starting to do better than the group, after lagging behind badly over the last year. Both stocks are in the process of catching up to the rest of the homebuilding group. [I refer you back to my January 3 Market Message headlined: "THE 18-YEAR REAL ESTATE CYCLE HAS A LONG WAY TO GO BEFORE HITTING ANOTHER PEAK"].

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Chart 4

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Chart 5
RISING BOND YIELDS HELP SOME STOCKS, HURT SOME... Bond yields jumped again this week, and ended just shy of an eight-month high. That's obviously bad for bond prices which suffered another drop. As I've pointed out before, rising bond yields are good for some stock groups, but bad for others. Chart 4 shows banks and life insurance stocks rising since January when bond yields started rising. They were once again two of the past week's strongest financial performers. And once again, two of the week's worst performers were utilities and REITs which started dropping during January. That's because dividend paying stocks lose their appeal when bond yields are rising. Banks can charge more for loans, while insurers can invest premium income in higher-yielding bonds.

Chart 6
SEMICONDUCTOR DROP PULLS TECHNOLOGY SECTOR LOWER... Semiconductor stocks took a big hit this week. Chart 7 shows the SOX Semiconductor iShares (SOXX) falling below its 50-day average to the lowest level in nearly two months (and on rising volume). The biggest casualty was Micron Technology (MU) which lost -18% on Friday. But a lot of other chip stocks have weak chart patterns. Semis lost -4% on the week and were the weakest part of the technology sector which also lost ground. Chart 8 shows the Technology Sector SPDR (XLK) falling below its 50-day line on rising volume. The XLK/SPX ratio (top of chart) has also rolled over to the downside during June. That means that the market is losing technology leadership, which isn't a good sign.

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Chart 7

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Chart 8
WATCHING GERMANY FOR GREEK CLUES... Greece remains at the forefront of every market conversation these days. The fact that Greek stocks jumped 16% this week may be an encouraging sign. I prefer to watch a more liquid eurozone market like Germany. Part of the reason is that German banks have the biggest stake in Greece's ability to repay its loans. Another reason is that Germany is Europe's biggest economy. I find its chart pattern encouraging. Chart 9 shows the German DAX Index ending the week on a positive note as its tries to climb back above its 50-day average and a resistance line drawn over its April/May highs. Its 14-day RSI line (top of chart) has turned up, as have its daily MACD lines (below chart). At its June bottom, the DAX had retraced exactly 50% of its December/April gain (and 38% of its October/April gain). Those retracement levels usually act as support levels. As Germany goes, so goes the rest of Europe. [New signs of weakness in the Euro may also give a boost the Germany's export-oriented economy].

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Chart 9
CHINESE STOCKS ENTER CORRECTION... Nothing goes up forever. Not even Chinese stocks. After doubling in price since last year, the Shanghai Stock Exchange Index has lost 19% from its June peak. The weekly bars in Chart 10 put that drop in some perspective. Its 14-week RSI line (top of chart) has turned down from overbought territory which confirms the loss of upside momentum. A 38% retracement of its entire rally starting last spring would bring the SSEC near 4000 which isn't too far way. A full 50% correction would bring its closer to its 2009 breakout point near 3500. Although its major trend is still up, mainland Chinese stocks have been badly in need of a correction. While that's going to cause pain for mainland retail investors who piled into A- shares over the few months, a healthy correction is probably better for Chinese stocks over the long term.
