Are Commodities Ripe?

Last month's comments out of the ECB regarding the potential for some form of QE launched the US Dollar out of a 12 month trading range.

The strength of the move is undeniable, but the indicators are clearly into Overbought territory.  The strong dollar has been weighing on Commodities.

Early this year, Commodities broke out off a 3 year wedge.  DBA is currently backtesting the breakout as the Indy's have reset.  A move up the ma's would represent a new breakout with a first target of 29. 

 

The Daily chart shows the top of the wedge.  It also reveals a smaller wedge that has formed since the US Dollars July low.  The smaller wedge was broken last week.  The Indy's look like the have room, but there needs to be a break of 26.85 for the big move.  

Corn looks interesting.  After getting whacked for 15% in May-June due to bumper crop reports, it got taken for another 15% after the US Dollars low.  Since then Corn has been wallowing between 25 & 26 on somewhat surprising volume.  It seems that the Indicators need more time to reset but Corn looks attractive above 26.5 with an obvious stop at 25.25.  With the first target of 30 a return of 10% would make a punt worth it.

Other non-agricultural commodities are showing potential bottoms including Oil, Copper & Unleaded Gas.  All ears will be on the ECB this Thursday when they announce their monetary plans.  If they announce QE plans, the size & scope will determine the markets moves.  Some QE is already priced into the US Dollar.  No QE, or, smaller than expected might provide the fuel for the commodities markets to make a comeback.

 

 

Atta Boy Junior!

The Juniors have quietly built a nice base.

After setting a potential base top, the junior miners are testing the ma's on declining volume.  Last week's bar shows a decent looking tail.   The last 2 month's pullback might also suggest a backtest of a June Breakout. 

 

A closer look at the Daily chart reveals a wedge breakout on Friday.  The Indy's look favorable, as do the the ma's.  A move up to 45-46 would set a nice looking Cup & Handle opportunity.

 

Zooming in on the Hourly chart shows the potential for another base with the base.  The Indy's are a bit extended short term which may prevent the Juniors from a breakout here.  A further test of the base top back to the ma's may be in order prior to a breakout.

GDXJ  is a long under 42.  A stop at 40 is a little loose, but for the patient holder the weekly target is 53 offering a decent return.  The shorter term target is 45-46.

 

Interest Rate Update

 

The 20yr down trend in Interest Rates continues.  The monthly indicators are pointing south with the MACD crossing down this month.  

 

The 8yr weekly down trend is also intact with rates down nearly 20% in 2014.  Seems like there is still time before rates get oversold.  24-25 continues to be the line in sand.  Until 25 gets taken out the path of least resistance continues to be down.

Relief at the Pump

Unleaded Gas took a tumble this week.

 

Unleaded Gas started the week with a gap down which ought to provide a short term cap on prices.  In the Puget Sound area prices should tumble after Labor Day.  It certainly would be nice to see prices below $3.75/gallon. 

Housing Perks Up

The Homies put in a strong week.

The Builders finished the week with a full candle adding nearly 5% for the week.  The indicators look set to extend the rally with the STOs heading North after showing POS D.  Just need the MACD to cross to confirm the rally.  If confirmed 28 looks like the target.

Likewise, Lumber looks poised for a breakout.

Lumber needs to make the move this week.  If it does the target is in the mid 400s.

Active Listings Fall

After peaking in September and matching 2012 levels, Active Listings have seen the seasonal decrease into yearend.  This is quite encouraging since listing could have easily kept increasing from the historic lows seen in 2012.  Typically listings don't pickup until March signalling the start of "Selling Season".  Even though inventory levels are only 250 homes away from the record low last year, it seems unlikely that inventory will drop that low during 2014. 

2013 Closings beat 2012 every month until petering out into yearend.  The interest rate spike in May and June may have prodded many fence sitters into buying resulting in the strong sales during the Summer.  Brisk September/October sales suggest interest rates aren't the only factor in sales rates.  Should the market produce sales above 2,200 in January/February inventory will remain depleted setting the stage for price increases. December's Months of Supply at 1.05 serves as a reminder of tight inventories.

In 2013 record low inventories coupled with increasing buyer interest pushed Case-Shiller prices up 14% last year.  After peaking in July prices leveled out thru October.  With weaker sales in November/December and ample inventory, Case Shiller prices ought to drift lower in November/December.  If inventory remain scarce into the Spring, prices are poised for another run up in 2014.  14% increases won't be seen as interest rates will continue to upside appreciation.  7% wouldn't be surprising.

2014 ought to be a good year for Builders/Flippers that can bring inventory to the market during the Selling Season.  Waiting until the Spring to set prices may be a profitable decision.

Implications of Higher Interest Rates on the Real Estate Industry

With interest rates breaking out to new highs it's interesting to speculate on the implications for the Real Estate Industry.

 

As noted here 10yr Interest Rates recently broke an 8 year trendline signalling higher rates ahead.  Curiously, over long term periods interest rate movements don't appear to have a direct correlation to home sales.

This chart of Used Home Sales shows the sharp dropoff in sales that started in 2007.  Used Home Sales continued to drop thru 2012.  This decline in sales was during a period of declining interest rates as seen in the interest rate chart at the top.  Sales of Used Homes began increasing at the beginning of 2013 which was shortly after interest rates turned up.  It seems Home Sales are more tightly correlated to strength in the economy and consumer confidence rather than strictly tied to interest rate movements.  Reasonably higher interest rates don't spell doom for the housing market.

The Homebuilding Industry doesn't appear to be affected too greatly by higher rates either.

 

When rates spiked starting in May, the Homebuilders had just come off a strong run from the 2009 bottom.  As rates quickly jumped 87%, the Homies corrected a mere 14%.  Since the rate run started again in November  both rates and Homebuilder stock prices are both headed up.  Higher interest rates aren't an impediment to higher Homebuilder stock prices.

 

Mortgage refinancing have dropped sharply throughout 2013.  Refinancing is highly sensitive to interest rates changes since most homeowners would voluntarily agree to higher mortgage payments.  The prospects of higher interests rate is going to continue to make life for Mortgage Brokers increasing difficult.  As it stands now, any loans a Broker made since 2011 is now dead money, since few of their clients from then will refi again.   Of course this also suggests than any borrower who intends to stay in their home should refinance now.

Higher interest rates are helping Regional Banks out.

 

Banner Bank's stock price is up 32% since September.  Regional Banks have had difficulty making money in the ultra loan interest rate environment.  Even with a cost of funds from depositors near .3% it is hard for banks to make money lending it out at 4%.  The Fed's pledge to keep short rates near 0% while opportunities to lend it out at higher rates has made regional banks an appealing investment for investors.  This situation ought to entice the Regional Banks back into real estate A&D loans now that they have better rate spreads and more evidence of a rebounded housing market.

 

Income Producing properties prices have rebounded quicker than residential.  Ultra lows interest rates have benefited Cap Rate calculations supporting higher prices.  An increase in interest rates will weaken Cap Rate calculations.  Cash flow will become an increasingly important investment criteria for income producing properties.  Without strong cash flows the standard ploy in a declining interest rate environment of a cash out refi without a paydown of principal will be more difficult to accomplish.   

The prospects of higher interest rates will create many winners and losers within the Real Estate Industry.  The key question remains why interest rates rise.  If it is within the context of an improving economy then the impact on the Real Estate Industry should be taken in stride.  If higher rates are the result of the removal of artificial support from the Fed the outcomes will be significantly different.

 

 

10yr Rates Hit a 2 Year High

Improving economic data and continuing taper blather pushed 10yr rates over 3% this week.

 

The Bull Market in rates continues on with higher highs throughout November and December resulting in a new high for rates this year.   Rates are now up 20% since the beginning of November. 

 

 Not only did rates set a new annual high, they are the highest they've been since 2011.  The new high broke a significant down trendline in place since 2011.  As resistance now becomes support at 2.9%, this ought to set a downside boundary for rates.  There isn't much resistance until rates reach 3.25%.  The indicators are still pointing up leaving plenty of room for rates to get there.

 It's looking like a convincing break of a 7 year downtrend.  All the indicators have room to move up.  The MACD in particular has room after just crossing up.  3.25% by midyear is only a matter of time.

  The bigger question is now how high can they go.  This 20yr chart adds a little perspective.  The 20 year downtrend is clearly evident.  It suggest significant resistance just below 3.5%.  It is unlikely to break such resistance on the first go around.  The most likely scenario is that rates touch resistance late in the Summer and back off thru the end of 2014.  Hitting the upper channel should cause the indicators to reset to Bull Market settings making RSI's in the 30's a thing of the past. 

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.