HOMEBUILDERS RISE ON GOOD NEWS -- FALLING BOND YIELDS PUSH REITS TO SIX MONTH HIGH -- NYSE ADVANCE-DECLINE LINE CLEARS 200-DAY AVERAGE -- NASDAQ TESTS 200-DAY LINE -- INTEL AND MICROSOFT SHOW TECHNOLOGY LEADERSHIP -- APPLE MAY BE TURNING UP
HOMEBUILDERS BUILD ON GOOD NEWS... Yesterday's announcement that homebuilding sentiment had jumped to a ten-year high was followed by today's report that September housing starts had the second biggest jump in eight years. Not surprisingly, homebuilders are having a strong day. The daily bars in Chart 1 show the Dow Jones U.S. Home Construction iShares (ITB) climbing more than 1%. In so doing, the ITB is back above both moving average lines. Its relative strength line (top of chart) has slipped over the last month as the rest of the market has rallied. But homebuilders have outperformed the S&P 500 by 9% since the start of the year. Low mortgage rates are one of the big reasons why. Low rates are also helping REITS.
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Chart 1
REITS ALSO BENEFIT FROM FALLING BOND YIELDS... Real Estate investment Trusts (REITS) are especially sensitive to the trend in bond yields. REITs are big dividend payers and complete with Treasuries for yield. Rising bond yields hurt REIT performance, while falling yields help. Right now, falling yields are helping. The daily bars in Chart 2 show the Dow Jones Wilshire REIT ETF (RWR) rising to the highest level in six months. The brown line just above the price shows the RWR/SPX ratio turning up at the end of the June. That was when the 10-Year T-Note yield (green line) turned down. Weak economic news, continued low inflation, and reduced expectations for a 2015 rate hike have combined to push yields lower. That's been good for anything tied to housing and real estate. Falling bond yields also explain the recent gains in utilities.
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Chart 2
NYSE ADVANCE-DECLINE LINE TURNS UP ... I recently showed upside improvement in a couple of breath indicators, which included the percent of NYSE stocks trading above their 50- and 200-day moving averages, as well as a buy signal in the NYSE Bullish Percent Index (the % of stocks in point & figure uptrends). Those indicators continue to improve. Here's another one. Chart 3 shows the NYSE Advance-Decline line climbing back above its 200-day average (red line) for the first time since July. It has also risen to the highest level in three months. You'll remember my showing the AD line peaking in May, and falling below its 200-day line during July, which warned of a downside market correction. The October upturn appears to confirm that the correction has ended and supports rising stock prices. [The NYSE AD line is a running cumulative total of the number of advancing minus declining stocks on the big board. A rising AD is bullish for the market].
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Chart 3
NASDAQ TESTS 200-DAY AVERAGE... The big test for the current market rally will be whether or not major stock indexes are able to clear their 200-day moving averages. The Nasdaq is the first index to reach that test. Chart 1 shows the Nasdaq Composite Index in the process of testing its 200-day average (red line). It's also testing potential resistance at its early July low and its mid-September high. Some hesitation at that barrier wouldn't be surprising. Eventually, however, it needs to close above the red line if it and the rest of the market are to continue to build on their October gains. Technical odds favor that happening. The Nasdaq is being held back by weakness in biotechs. But it's getting help from some of the large technology stocks.
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Chart 4
TECHNOLOGY SPDR SHOWS RELATIVE STRENGTH ... The direction of technology stocks has a huge bearing on the direction of the Nasdaq market. That's why it's encouraging to see the Technology Sector SPDR (XLK) trading at the highest level in two months, and well above its 200-day average (red line) (Chart 5). The XLK/SPX ratio (top of chart) also shows relative strength in the technology sector. That's usually a good sign for the Nasdaq and the rest of the market. Some of the biggest techology stocks in the XLK also show strong chart patterns.
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Chart 5
INTEL, MICROSOFT LOOK STRONG -- APPLE TURNS UP... Two of the biggest stocks in the Technology SPDR have strong chart patterns. And a third may be turning up. Chart 6 shows Intel (INTC) trading at a new five-month high after breaking through a falling trendline drawn over its December/May highs. The Intel/SPX ratio (top of chart) has also turned up. That's a good sign for Intel and the semiconductor group. Although chip stocks have been rallying on possible merger talk, Intel is the biggest stock in that space. Chart 7 shows Microsoft (MSFT) nearing the top of its 2015 trading range and not that far from a new record high. Its relative strength line (top of chart) shows technology leadership. Microsoft is the second biggest holding in the XLK. Apple is the biggest. Chart 7 shows Apple (AAPL) trading above its 50-day average today (blue line) for the first time since July. Apple is not only the biggest stock in the technology group; it's also the biggest stock in the stock market. An Apple upturn would a positive sign for the entire market.
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Chart 6
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Chart 7
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Chart 8
HIGH YIELDS BONDS REGAIN 50-DAY AVERAGE... Another positive sign for stocks is that fixed income investors are buying high yield bonds again. Chart 9 shows the iBoxx High Yield Corporate bond iShares (HYG) climbing back above its (blue) 50-day average for the first time since June. High yield bonds are highly correlated with the direction of stock prices. Low Treasury yields and stronger stock prices are an incentive buy into this riskier bond category.
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Chart 9
DOLLAR REMAINS WEAK... Another side-effect of lower interest rates is a weak dollar. Chart 10 shows the PowerShares Dollar Bullish ETF (UUP) trading near its low for the year. It remains below its moving average lines, and its 50-day line is below the 200-day. The dollar peaked in March and has been falling since then. That lower trend has several intermarket implications. For one thing, a weaker dollar lends support to commodities and stocks tied to them. A weaker dollar is boosting emerging market currencies and stocks. A weaker dollar is also good for earnings of U.S. multinational stocks, which have cited a strong dollar as a reason for lower earnings. Chart 10 clearly shows the dollar falling through most of this year. That should start to help future earnings. It should also help stock prices which usually look forward instead of backwards.
