iShares Dow Jones US Home Construction (ITB)
One of the losers from the Fed’s policy statement last week and Janet Yellen’s rate hike comments may be homebuilders. The fund is back to where it began 2014, giving back all of the large gains that came last week on positive earnings from homebuilders. Higher interest rates will push up mortgage costs for homebuyers, lowering the price they are able to pay for a home.
Another factor may be federal legislation aimed at winding down Fannie Mae and Freddie Mac. The current proposed law does not have enough support to pass, but it does look as though Congress is ready to reduce the role of government in the housing market. This will also push up mortgage costs as the government is currently subsidizing the housing. Without that support, private lenders will bear the cost of bad loans. They will make credit more expensive and harder to obtain, reducing the pool of eligible buyers at today’s prices. Home prices may rise for other reasons, but this new factor will put downward pressure on prices.
The momentum leaders finally broke their 2014 run. While solar (TAN) is still holding up, biotech (IBB) plunged below its 50-day moving average on high volume. Social Media (SOCL) dropped along with other Internet ETFs. The losses weren’t confined to the U.S. either: PowerShares Golden Dragon (PGJ), a fund with heavy exposure to Chinese Internet companies listed in the U.S., dropped as well.
This current move lower takes SOCL into negative territory for 2014 and IBB has given up much of its gains for the year. All the high-flying names such as Tesla (TSLA), Netflix (NFLX), Amazon (AMZN) and LinkedIn (LNKD) are coming under pressure as well.
The current slide in these funds does not yet constitute anything more than a normal pullback following an intense run-up in shares. Individual charts of many leading companies reinforce this interpretation. There was also a similar dip in these sectors in late-January, when the broader market was selling off. Shares will need to fall a lot further before a bearish interpretation would even become a possibility.
db X-Trackers Harvest CSI 300 China A-Shares (ASHR)
China’s mainland stock market saw a huge bounce on Friday of last week following several stock market reforms. The securities regulator raised the limit on foreign ownership from 20 percent to 30 percent. Companies will now be allowed to issue preferred shares; that move spurred heavy buying in the banking sector, where many firms are expected to raise capital in the face of deteriorating loan portfolios. Finally, the Chinext market saw listing rules eased, opening the market to more industries as well as reducing profit requirements for firms.
As the chart below shows, the 2000 level has served as a solid support level over the past 16 months. Chinese stocks are unloved in China, with property seeing the most speculation. Additionally, the weakening yuan offers some support for stock market valuations. A move below remains a strong possibility since a bursting of the housing bubble would unleash some measure of panic in China. However, if China’s slowdown doesn’t become a crisis, stocks may be close to the bottom, if they aren’t there already.