Market Bets on Rate Cuts. Plus, a New Housing Sector Trade with Explosive Potential.

A short squeeze is brewing in today's pick.

The Fed meets this week and the bond market is already betting on a bullish outcome to the enclave.  Of course, there are no guarantees and we may get the usual “data dependent” pro-forma statement.  But aside from the FOMC’s statement, Fed Chair Powell’s post statement press conference will affect both stock prices and bond yields.

As I noted recently, the homebuilder stocks have been the bellwethers regarding the path of interest rates of late.  Moreover, with the major structural changes to the housing market, as I described in detail here, money flows into the sector are increasing.

Still, with the homebuilder stocks already in full momentum mode, it’s important to find those stocks in the sector which are on the cusp of making their big move. Today, I feature one of them.   Specifically, this stock looks set to undergo a major short squeeze.

Bond Yields Test Major Support Area

With the Fed’s latest decision on tap for this Wednesday (7/31/24), bond traders seem to be betting on some sort of movement from the central bank toward lower rates, perhaps as early as September.  Of course, no one knows what the Fed will do. Yet, with recent inflation data showing a flattening out of the rate of rise in its trajectory, and with a barrage of employment data, culminating with the non-farm payrolls number on Friday, we may see a softening of the central bank’s stance.

The U.S. Ten Year Note yield (TNX), the benchmark for most 30-year mortgages is testing the lower part of its recent trading range.  A move below 4.1%, would be very bullish for the homebuilder and REIT sector.

The S&P 500 (SPX) has found fledgling support at its 50-day moving average for now, although it has not become fully oversold. That means we may get one or two more downward thrusts before a more credible bounce materializes.

The market’s breadth, as in the New York Stock Exchange Advance Decline line (NYAD) has held up much better than the major indexes. We’ll see if that trend remains in place.

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