Bonds are looking Dodgy

Positive economic news this week has pushed interest rates to a key pivot point.  GDP growth of 3.6% and over 200,000 new jobs added in November has rates on the 10 yr Note testing some longer term trendlines.

The Daily charts show the resolution of the possible Head & Shoulders pattern by the breakout above 2.75%.  This ought to prove strong support on any backtest.  A stop below the 50 day ema will limit any losses.  The MACD  suggests a move above 3.0% is probable which would be a new recent high in rates.

A break above 3% would snap a 3 year trendline.  The weekly indicators show plenty of room to support a breakout.  Should rates crack 3.0% 3.5% will be the next target.

The eight year chart shows the significance of the 3.0% mark.  A move above 3.0% would be a breakout of an seven year trendline.  Once again, the indicators are supportive of such a move with the STO bouncing of 20.  

Should the 3.0% level snap, the next resistance is at 3.5%. Good support is evident at the 50 month ema of 2.53%.  The implications of breaking 3.5% are not good for rates.  3.5% is the current breakout point of a 20 year trend in consistently lower interest rates.  There are 2 main possible reasons that rates might break 3.5%.  The favorable reason for a break above 3.5% would be continued economic growth.  This would be a bullish outcome for the economy.  The other reason for rates to rise would be failed monetary policy.  This would have very bearish consequences for the economy.   

The Homies are Breaking Out

Looks like the Homies Broke out last week.

XHB, a Homebuilder index, has been forming a triangle for the last 6 months, digesting its run up since 2012.   This week the index broke out at 31.75.  Volume was weak on the breakout, but it was a Holiday shortened week.  Follow thru next week is key to ensuring it was a clean break. A 4th Wave triangle would measure up to 38 for a potential 19% gain.  Being a 4th wave triangle would suggest that the rally should be quick.  The Indicators are turning up and look supportive of a move higher.

If the stock market still has predictive economic abilities, as opposed to be a voting machine, a breakout indicates the housing market's Selling Season ought to be robust.

Using the daily chart to zoom in on the triangle shows this weeks' breakout.  The breakout had decent volume but the Holiday light trading volumes didn't show much follow thru.  After a spike opening on Black Friday that touched the 52 week high, the move tuckered out.  The Daily indicators are a little tired looking but have room to move up.  Significant support should show up at 31.50 to 31.75 if the move is valid.  The 50 day moving average should provide additional support at 31.  Measuring the height of the base gives XHB a target of 37.

The 60 minute chart shows the spike opening on Friday.  There just wasn't enough volume to provide any follow thru.  The indicators are in the process of resetting.  The 50 hr moving average is pointing up to provide future support at 31.75 which is where the breakout occurred.  

XHB is a Buy between 31.70 and 31.80.  The Stop can be tight at 31.50 because if that broke XHB would find a good bid in the mid 30's.  The target of 37-38 should be hit by the end of April.  

The Homies

After a stunning 225% increase from October 2011, ITB (the homebuilder ETF) has dropped 13% since the may top of 26.

It has dropped below both the 50 & 200 day emas.  A further drop to 16 would represent a 50% decrease of the prior run which might make for a good long entry point.

The July target of 15 for KB Homes still is in play, as the head and shoulders pattern portends.

Puget Sound Housing Update - The Conundrum Continues

Sales remain elevated...


So far in 2013, King County Home Sales are well ahead of last year and are outpacing every year since 2008. Last month 2,096 homes were closed.

In the meantime...


Inventory is at all-time lows.   3,221 homes are currently on the market.  Inventory has remained steady since November of last year.  The increase in sales must be coming from new listings.  This is encouraging since it implies that the traditional move up buyer is coming back to the market.  They appear to be putting their home on the market and buying another thereby being inventory neutral.  Closed sales to inventory is at an extremely tight 1.5 ratio.

With demand for homes being greater this year and supply unusually low, what are prices doing...





Surprisingly they have been basically flat since July 2012.  Typically in the case of increased demand and tight inventory, price would do its job and move up to balance supply & demand.   Of course, Case Shiller is a repeat sale index.  Perhaps another view of prices is in order.

The median price of closed sales is currently higher than prices going back to 2009.


With Case Shiller being flat and median prices increasing, it would insinuate that higher priced homes sales are greater than they were last year.  This might add some credence to the theory regarding the move up buyer.

Since I refuse to believe that the laws of economics have been repealed, what would need to happen to resolve this conundrum?  Supply would need to increase without a commensurate increase is sales.  That would suggest that one-sided sales such as foreclosures would need to increase.





Bank owned sales spiked late last year, but nowhere near the peaks of 2011.  I would expect further decreases in Bank owned sales.  Many Banks have discovered the benefits of short sales in lieu of foreclosure.  That trend should continue.  So it doesn't seem that foreclosures will start a flood of inventory to the market.  The other source of new inventory will come from new home builders.  Anecdotal information suggests that the builders have been as surprised as anyone with the increase in sales and have been caught short of land.  There is no landslide of new lots coming on due to builders.

What about demand...

One boost to demand has been low interest rates.  While off their lows, the ten year note rate has been in a channel since the mid-2012 lows.  A key pivot point is coming up in the next few weeks.  A break of the upper trendline would signal higher rates.  A reversal would argue for the opposite to happen.  Anything in between is just noise.  A decisive break up and out of the channel would certainly be detrimental to the market in terms of lower demand.




Another threat to demand is the number of unemployed people.  King & Snohomish Counties have seen their unemployment rate plummet since the peak in 2010.  While there are certainly many that are underemployed, or, would go back to work if they were handed a job, the trend is clearly towards lower unemployment levels.  Seattle is actually within a stones throw of the tight labor markets of 2007 & 2000.  The simple fact that the rate is dropping makes current employees more secure in their jobs, unlike 2009 which looked like there was never going to be any job creation.  Unemployment doesn't appear to be a threat to housing demand.

Barring a sharp increase in rates, the only thing left for the market to do to reach equilibrium is for prices to increase.  If this is indeed the situation then the lagging Case Shiller index should start showing increases soon.  On Tuesday the March (3 month average of January, February & March) index will be released.  I would suspect we'll start seeing the index moving up.

Most charts from Seattle Bubble.

NW Stocks Roundup

The Stocks of the larger companies headquartered in the Puget Sound region continue to perform quite nicely.  It would appear that investors have confidence in the areas companies to do well moving forward.  Unfortunately, the link between higher stock prices and a companies future economic performance has become shaky at best of late due to the flood of liquidity the Fed has been pouring into the marketplace.  However, if higher stock prices do turn into enhanced future performance, all systems are go for the Puget Sound area.

Boeing reported earnings yesterday and got rave reviews from Wall Street.  BA was rewarded with a 3% increase in the stock prices.  It's too extended to jump in now, but the indicators suggest further upward movement in the stock.  Boeing has enjoyed a 28% increase YTD in spite of the battery issues with the new Dreamliner.  It appears that issue is being resolved clearing the way for future delieveries.  I wouldn't anticipate many more layoffs than have already been announce.

Microsoft has caught fire this month.  Improved earnings and word of increased Hedge Fund interest in the stock has vaulted the stock over 10% this month.  MSFT is nearing a new 52 week high.  I would anticipate that the stock needs to take a breather near term as it is getting quite over bought.  A pullback near $30.25 would represent a nice entry price.  MSFT's releases last year are starting to show up in their earnings.  The recent release of Windows 8 for the mobile market has been slow out of the gate but represents further growth opportunities.  An update to XBOX is due later this Spring.  The stock price action suggest Microsoft will continue its hiring spree.

Amazon has spent most of the year consolidating.  One more pullback to a confluence of the 50 day ema and prior support near $264 would be a wonderful opportunity.  A stop at $258 would limit any damages.  On the other hand, the stock looks more like to break north over $272.  That should lead to a run at the previous high at $285.  Bezos will most likely continue to leverage his stock price and follow thru with his buildout in South Lake Union.  There appears to be no reason to slow Amazon from gobbling up new hires.

Costco broke to a new high yesterday.  The indicators suggest that it has room to move.  The minimum target is still $110.  $104 turned out to be a great entry point when the 50 day ema, trendline support, prior high support and oversold indicators all came together.

Starbuck also hit a new high yesterday.  The target remains at $63.  A stop below $58.60 is appropriate.  The indicators suggest the target is achievable.

Nordstroms is still below the 52 week high having been in a consolidation phase since last September.  The stock has a good opportunity to move higher after bouncing off the 50 day ema last week.  A better buy in point would be near $54 where trendline and 200 day ema support comes in to play.  A break to a new high would target the low $60's.
If stock prices still reflect investors expectations for future growth, the Puget Sound area should be in a reasonably strong economic growth pattern during 2013.

Macro Update

The global economy continues to look like it's slowing down.  

 Doctor Copper is down 30% since 2011.  It recently broke thru support at 43.  The last line of defense is at 40.  A support break points to much lower Copper prices.  As one of the critical industrial metals, a break would signify that a significant slowdown in process.  The indicators are quite oversold which may lend some support to Copper.  After this weeks plunge in Gold from a very similar looking triangle, it's probably best to wait to see how the market handles 40 before placing a trade.  Long term triangles like the one Copper is sporting tend to resolve themselves in a continuation of the prior trend (up in Copper's case) but when they don't...look out below.

 Lumber is taking a much needed pause.  After a 120 pt (40%) romp since October, Lumber looks tired.  Good support comes in at the 34 week ma, but the indicators suggest Lumber will hit major support at 320.  Mill shutdowns in the wake of the housing bust has caught producers undersupplied, while the Home Builders have been squawking for more and more product as new home starts have rebounded from extremely depressed levels.  Consequently, new Home Builders have seen framing lumber prices take off.  Likewise, the price of just about every home building material has increased.  The next shoe to drop will be when construction labor stops clamoring for higher wages.

The above chart of the Home Builders helps explain Lumber's price increase.  The Home Builders have zoomed from 280 to 400 in the last 18 months, a whopping 150% increase.  The Homies are on the verge of breaking a significant trendline.  Additionally, the index closed below the 13 week ma.  I believe the correction won't be too ferocious but will represent a pause in light of such an increase.  I would expect the Home Builders to rattle around while the indicators reset.  As long as scant standing inventory remains in the marketplace, Home Builders ought to be able to make money, even with historically low starts.

 

 Oil showed more cracks this week, breaking a 4 yr trendline.  Additional support shows up at 27.  Price has been fairly stable since the bottom in 2009, wavering between 30 and 40 with a flat MACD.  Probably not worth it, but a reasonable scalp would be going short at $32.25 with a stop at $34.25.  The target would be 28.

 

Fortunately, Unleaded Gas has been trading in a well defined range since 2011 bouncing between $3.40 and $2.50.  This move looks like more of the same with a bounce at $2.50.   This move down represents a reasonable shot at a triple top which would portend a move down to $1.70.  This doesn't seem likely, but I would certainly be in favor of significantly lower gas prices.  The more likely trade would be to go long at $2.50 with a tight stop at $2.40.

  

Just when it looked like rates couldn't go any lower, they appear poised for another plunge.  The TLT above shows the bond price, which has an inverse relationship to rates.  This powerful looking flag has the potential to push the bonds up to 155 over time.  While lower rates are a boon to borrowers, lower rates will probably be the result of a slowing global economy.  Mortgage brokers may soon see yet another refinancing boom.  Holding bonds here looks good with a stop at the confluence of the moving averages 119.  Confirmation of the uptrend will be when the indicators break the downtrend lines, and, when a new high is established at 130.

The big question for me is will a slowing global economy derail the rebound in housing.  Lower Copper & Oil prices have been attributed by many pundits to a slow down in the emerging markets like China & India.  This wouldn't appear to affect the local housing market.  Higher Lumber & Home Builder prices reflect increased demand for homes vs a shortage of available homes for sale.  Slower global growth that results in lower interest rates helps increase the demand for local homes.   Taken together, lower interest rates should trump other deflationary trends resulting in a decent housing market.