Early Warning

Market Moves

Stock market indexes closed virtually unchanged after a day of lackluster trading action. The commodity markets were similarly lackluster, while the U.S. dollar and interest rates rose. Correlated to the interest rate move, bond prices fell.

This is the second day in a row of similar price action for all markets. Although interest rates edged higher, interest-rate sensitive stocks didn't seem to do the same. Most stocks in interest rate sectors instead showed selling pressure similar to major market indexes.

The only anomaly appears to be in the Volatility Index (VIX). The index readings have crept slightly higher this week despite stock prices also drifting higher. Astute chart watchers recognize that this dynamic is typically reversed.

The chart below shows the peculiar anomaly in VIX prices right now. Normally, as prices move higher, the index makes new lows. For the past three price peaks on State Street's S&P 500-tracking index (SPY), this has been the case, but this week so far, the VIX remained at higher levels despite stocks rising slightly. This unusual signal implies that traders are worried that the markets might drop surprisingly in a short duration at some point in the not-too-distant future.  

Chart showing the performance of S&P 500 and the volatility index

Homebuilders at a Top?

There are many bullish signs in recent market action, so when a subtly bearish indicator comes along, it is important to see if any corroborating evidence shows up elsewhere in the markets. Ever since the events of 2008, nervous investors naturally look to the real estate industry for signs of trouble. In reviewing the chart of State Street's Homebuilder industry-tracking ETF (XHB), there is also a subtle indication of trouble afoot. 

The chart below shows how this fund has been in a horizontal price range for the past two months. Comparing the sideways price action with a volume-weighted indicator like the Chaikin Money Flow reveals that the recent high-volume selling has put the fund in a weaker-than-expected position right now. 

Chart showing the performance of homebuilder stocks

Anticipated New Inventory Drives D.R. Horton Lower

A likely explanation for the nervousness that seems to have appeared in the homebuilder sector might be found in the data from Tuesday's reports on new housing permits and new home starts. Both of these published five-year highs, which exceeded projections for the past month.

Chart showing new permits and home starts

This newly anticipated inventory is feared to be an oversupply of housing in what some consider a market that is beginning to cool down. Indeed, the chart below shows that shares of the largest holding in the XHB industry fund, D.R. Horton, Inc. (DHI), dropped by a significant amount: 1.7% in yesterday's otherwise lackluster trading.  

Chart showing the performance of D.R. Horton, Inc. (DHI)

The Bottom Line

Large-cap stocks closed unchanged, while commodities were mixed and bond prices fell. Volatility isn't pricing as usual for some reason, and homebuilder stocks seem to also show subtle signs of stress. Could these be early warning signals? 

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