RISING BOND YIELDS HURT HOMEBUILDERS -- THAT'S HELPING MAKE CONSUMER DISCRETIONARY SECTOR THE WEAKEST PART OF THE MARKET THIS YEAR
RISING RATES HURT HOMEBUILDERS... Weakness in homebuilding stocks is another sign that the U.S. economy is weakening. Rising mortgage rates which are closely tied to bond yields have a lot to do with that. The brown weekly bars in Chart 1 show the U.S. Home Construction iShares (ITB) peaking last October and having fallen to the lowest level in two years. Moving averages lines also show the ITB in a major downtrend. The green line plots the yield on the 10-Year Treasury bond which turned sharply higher last October (green arrow) and touched an eleven year high this past week. That sharp upturn pushed mortgage rates sharply higher as well and corresponds to the peak in the ITB and its weak performance since then. Home construction stocks were the weakest part of the Consumer Discretionary SPDR (XLY) this week. Relative weakness in that economically - sensitive sector is another bad sign for the stock market and the economy. The SPX entered a bear market of its own this past week after losing more than 20% on the year.
CONSUMER DISCRETIONARY SECTOR SHOWS RELATIVE WEAKNESS... Consumer discretionary stocks are down -33% year to date and are the weakest stock sector for the year. The black weekly bars in Chart 2 show the XLY falling to the lowest level in two years and on rising volume. Its moving average lines are also bearish. So is its relative strength line. That's shown by the falling red line which plots a relative strength ratio of the XLY divided by the S&P 500. Since the XLY is tied to consumer spending, it's weak performance also reflects a weakening economy. Home construction stocks are down an even steeper -41% for the year and the second worst performer in the XLY.
As for the market in general, stocks this past week suffered their biggest decline since 2020 with the S&P 500 falling to the lowest level in two years. According to the Wall Street Journal all eleven market sectors have lost -15% of their value with seven of them in bear market territory with losses exceeding -20%. Energy stocks, which have been the market's strongest sector all year, lost -17% this past week and were the market's weakest sector.
ENERGY STOCKS HAVE BAD WEEK...The daily bars in Chart 3 show the Energy Sector SPDR (XLE) falling sharply this week and on heavy volume. It appears headed toward a test of its April low. Selling in the XLE coincided with a 10% drop in the price of WTIC crude oil fell from above $120 to end the week just below $108. Energy stocks were the only market sector still in an uptrend. This week's profit-taking may put that XLE uptrend in jeopardy.
