29, May 2017
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Tom McClellan

Chart In Focus

Will Labor Shortage Kill Housing Boom?

 

Chart In Focus

May 20, 2017

We know by the message from lumber prices that the next 12 months should be a positive period for all sorts of housing related data.  New home sales, for example, tends to follow in the footsteps of lumber price movements with a lag time of about 1 year.  So because lumber prices have been trending strongly higher, that should mean higher numbers of new home sales.

This is especially true with all of the “echo-boom” generation getting into their late 20s, and starting to look at buying versus renting.  The peak birth year of the echo boom was 1990, and those kids are now 26-27.  Zillow says that the average age of a first time home buyer is 33 years, so that pig is still moving through the python.

But there are new worries that those homes won’t get built for those kids to buy, because there may not be enough trained labor to build those homes.  Data from the Bureau of Labor Statistics (BLS) shows some tightening in labor rates for the construction industry.  And when the overall unemployment rate is at 4.4% (yes, I know about the problems with those numbers), it is harder to attract workers out of other industries to come and work construction. 

Here is total employment in the construction sector, all types, seasonally adjusted:

Construction employees

It has had a big overall rise, just as total population has in the U.S.  And there are obvious big swings during recessionary periods. 

Looking deeper, here is the unemployment rate for construction workers:

Construction unemployment

There is an obvious seasonal fluctuation, as winter gets in the way of construction work.  Spring 2017 is seeing the jobless rate drop as normal.  But the 12-month moving average shows that the overall rate is already down to the same low level it reached in 2006.  This suggests that there is not a whole lot of slack remaining in the market for construction workers.

Meanwhile, job openings continue to climb.

Construction job openings

The 12-month moving average (MA) is back up to where it peaked in early 2007.  Back then the housing bubble was choking itself off with all of the speculative buying, condo-flipping, and overleveraging with junk mortgages.  Now it seems that the genuine demand for workers to build the houses that the echo-boomers need is exhausting the available supply of trained construction workers. 

This has all sorts of implications for the housing economy, and anecdotal reports show that twenty-somethings are having a hard time finding available stock of housing to buy.  That is likely to mean continued price increases for starter homes, although not necessarily for other parts of the housing market.  Whether it has implications for Congress addressing immigration laws to allow more construction workers to come in from Mexico and Central America is a wholly separate question.

Tom McClellan
Editor, The McClellan Market Report

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Tom McClellan

Chart In Focus

China Is Pulling U.S. Bond Yields Higher

 

Chart In Focus

May 12, 2017

It is not a surprise that U.S. Treasury yields are correlated with those of other countries.  And so it should not be too much of a surprise that when China’s 10-year sovereign bond yield is zooming upward, that the U.S. 10-year T-Note yield should follow. 

China’s 10-year yield is getting pressure from shorter maturities.  Their 5-year sovereign yield just pushed up above their 10-year yield for the first time since records began.  The moves are being credited to Beijing’s efforts to stop the slide in their currency.  Maybe China’s central bankers are believing former Fed Chairman Ben Bernanke’s 2007 statement, that “the yield curve could be inverted for a considerable period without significant implications for the economy as a whole, yes--- possibly for some banks, but not for the economy as a whole."  Yeah, that turned out well. 

Whatever the cause, it appears to be having an effect on U.S. yields, as this week’s chart shows.  But while the chart shows what is currently happening, I like to have an idea about what is going to be happening.  And it turns out that these same data have a tell about that point.  When the two yields get too close together, or too far apart, that offers us information about what comes next.

China-US 10-year yield spread

Right now we are seeing a comparatively high spread between the two.  That condition typically means U.S. T-Note yields have further to rise.  Conversely, a very low spread, below the lower band, says that U.S. yields should fall in the weeks that follow. 

But that predictive effect really only works on what the U.S. yields are going to do.  It does not necessarily tell us what the Chinese 10-year yields will do.  For that, there is a perhaps even more interesting relationship:

China 10-year yield vs. copper prices

It turns out that the Chinese 10-year yield and copper prices are very closely correlated.  That’s not much of a surprise.  But the fun part is that when the two disagree, it is copper that usually ends up being right about where both are headed. 

That is important because right now, copper prices are trending downward while the Chinese 10-year yield is trending upward.  If copper is correct as usual, then the Chinese 10-year yield should not have much further to trend upward.  Getting the Chinese yield to put in a top should eventually mean a top also for the U.S. 10-year yield, but not for at least a few more weeks.

Tom McClellan
Editor, The McClellan Market Report

 

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Tom McClellan

Chart In Focus

High-Yield Bond A-D Line

 

Chart In Focus

April 27, 2017

Junk bonds are the canaries in the stock market’s coal mine. 

If you want to know ahead of time that trouble is coming for the stock market, then one of the best places to look is the high-yield (or junk) bond market.  The movements of prices among these bonds correlates much more closely to the stock market than to T-Bonds.  More importantly, when liquidity gets tight, the junk bonds are the first to be sold by traders wanting to lessen their portfolio risk. 

We can see the importance of this message in this week’s chart, which features A-D data from FINRA TRACE.  For those who like the full spelling of acronyms, that means “Financial INdustry Regulatory Authority Trade Reporting and Compliance Engine”.  FINRA tracks the price changes on a total of 7876 individual bonds, and breaks down the Advance-Decline statistics into categories of Investment Grade, High Yield, and Convertible bonds.  The chart above features the A-D data for the High Yield bonds.

This A-D Line arguably does a better job than the composite NYSE A-D Line at doing what we want an A-D Line to do, which is to show us divergences at important times.  That is the whole reason behind ever looking at breadth data of any type.  We want it to give us an answer which is different from what prices are saying, but only at the right moments. 

A lot of analysts mistakenly assert that if one is interested in the stock market, then one should only look at A-D data from the stock market.  And to take that point further, they assert that one should filter out all of the contaminants such as preferred stocks, rights, warrants, bond closed end funds, and other detritus which together are making the stock market less pure.  I debunked that point in a March 24, 2017 article

Just recently, the overall NYSE A-D Line moved to a new all-time high, saying that liquidity is plentiful and it should lift the overall stock market.  The same message comes from this High Yield Bond A-D Line, which has also pushed ahead to a new all-time high.  The message is that liquidity is so plentiful that even junk bonds can go higher.  And history shows that such plentiful liquidity is also beneficial for the overall stock market.

Tom McClellan
Editor, The McClellan Market Report

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Tom McClellan

Chart In Focus

Is Iron Ore Weighing Down Stock Market?

 

Chart In Focus

April 20, 2017

Some U.S. stock market investors are getting worried about the price of iron ore in China.  This week’s chart helps to show why.

One analyst who noticed this relationship was Alastair Williamson of Stock Board Asset, who published this Tweet on April 18, 2017:

StockBoardAsset tweet

It is definitely an intriguing chart, and a relationship I had not explored before.  I have come across a large number of interesting intermarket relationships like this one, and it is always fun to find (or be shown) a new one.  But not all of them have merit.  So what I’d like to do is use this one to show you how I typically like to contemplate a new relationship that I encounter.

So my first question is about whether the relationship is a durable one.  The answer, it turns out in this case, is no.  The two have only recently fallen into this apparent correlation.  Here is a longer term look:

Iron ore prices versus SP500

Prior to early 2015, there did not seem to be any relationship at all.  Since that point, they do seem to be correlating.  But perhaps what we have is more of a leading indication relationship.  Here is that same chart, with the iron ore futures price plot shifted forward:

Iron ore and SP500 forward offset

I played around with different offset periods, and got the best looking alignment of the recent data with a 29 trading day forward offset of the iron ore price data.  I do not have an explanation for that period; it is just what seems to work the best.  And this adjustment still leaves the period before early 2015 showing hardly any correlation at all.

As an aside, I am often asked about whether I have investigated the Pearson’s Correlation Coefficient for a particular relationship.  A lot of technical analysts like to employ that tool, because it is very easy to get a result in Excel or other programs.  But statisticians know that Pearson’s is not a tool that is designed for time series data.  It is better for analyzing attributes of a population.  And there are better tools for time series data, but they are harder to use. 

Pearson’s Correlation Coefficient can also get fooled by trends in the data.  See more about that topic in this article from 2010: Correlations May Not Be What They Seem.

The last part of the answer about correlation coefficients is that I usually do not need a number to tell me whether data are correlated.  It is usually pretty obvious from looking at the chart.  The eye can get fooled, it’s true, and so one should be mindful of that when doing any chart analysis.  But if there is something there in a relationship, or if there is not, it is usually pretty obvious. 

Coming back to the relationship under discussion, this difference in behavior before and after 2015 leaves us with a difficult question: Is this a durable relationship, or just a spurious correlation that the stock market happens to have fallen into just recently?  That matters a lot as we contemplate the recent sharp drop in iron ore prices.  If this is a relationship which can be believed, then that sharp drop says bad things about the future for the stock market. 

To contemplate that point further, here is a chart that zooms in on that 29TD forward offset relationship:

Iron ore prices and SP500 forward offset

The correlation between the SP500 and this forward-shifted plot of iron ore prices which seems to have worked pretty well in 2015 and 2016 seems to now be breaking down.  So on that basis, I am not worried about the stock market repeating the recent plunge in iron ore prices.  But I do plan to keep watching it.

Tom McClellan
Editor, The McClellan Market Report

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Tom McClellan

Chart In Focus

Gold Resolves Some Bearish Divergences

 

Chart In Focus

April 15, 2017

A week ago, it was not looking good for the gold bulls.  The dollar price of gold had not yet made a higher high, even though the Japanese yen had already pushed to a higher high.  When divergences like that happen, it is typically bearish news for both gold and the yen.

But what looked like a bearish divergence then has now been resolved in favor of the bullish case.  The price of gold has now joined the yen in making higher highs. 

This is an important point for all chartists to understand: just because you see what looks like a divergence, that does not mean it has to persist.  Divergences do matter, and they deserve our attention, but they can resolve themselves so you have to keep watching and pay attention.

A similar divergence was also showing in the comparison between the dollar price of gold and the price measured in euros.

Gold priced in euros

A week ago, the dollar price of gold seemed to have stalled at a downtrend line, even though the euro price had already broken the equivalent long before.  And the price of gold as measured in euros had not yet made a higher high to confirm the dollar price’s higher high.  That is a problematic sign, and I like to say that whenever the two disagree, it is usually the euro price that ends up being right about where both are headed.  So it was troubling last week when we seemed to have a divergence.

Now that divergence has been made moot by the price of gold in both currencies moving higher.  Remember that all divergences in real time are only potential divergences.  One cannot call them “for sure” divergences until much later.  Apparent divergences are worth noting, but not worth panicking about absent more proof.  They can get resolved, as these examples illustrate.

Tom McClellan
Editor, The McClellan Market Report

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