Chris Kimble: In the last seven months, the S&P 500 has rallied 7%. Is all good in the neighborhood? Is this a big rally? Not when you compare it to the rally in yields! When it comes to interest rates, they’ve rallied much more. For example, the yield on the 10-year note is up almost 50% in 6 months! (See inset box below.)
What sector of the economy has felt this increase in interest rates the most? One sector that has been hit hard is Real Estate. The inset chart shows that IYR (Real Estate) is down 14% and ITB (Homebuilders) is down 17% during this sharp rise in interest rates.
The chart two-pack reflects that bearish patterns (rising wedges at resistance) were in place in the key sector, prior to rates jumping. Did Real Estate fall because of the patterns or because of rising rates? How about some of both!
The talking heads continue to discuss the potential of a taper by the Government. Does that mean rates will rise? If rates do rise, will it continue to hurt this sector? The current pattern in IYR and ITB could be a head & shoulders topping pattern. Keep a close eye on the price action of these two in the near future, because, historically, weakness in the sector has had important impacts on the overall economy.
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This article is brought to you courtesy of Chris Kimble which appeared at Advisor Perspectives.