Monday, September 04, 2006

$TNX and $HGX

I was reading a MarketWatch article on the housing sector and learned about $TNX and $HGX.

The $TNX is CBOE's 10-Year Treasury Note Yield Index. Since the value of the index is the 10-year yield, the annual yield is simply the index value divided by 10. So a current index value of 47.26 means an annual 4.726% yield on the 10-year Treasury Note. This annual yield is very important for the housing market, because it is the traditional benchmark for mortgage rates. Changes in mortgage rates affect cost of construction and qualification of buyers, and rising rates can lead to increasing mortgage defaults and foreclosures.

The $HGX is PHLX's housing sector index. It includes the top homebuilders plus some top construction supply companies -- quotes for HGX components, sorted by descending market cap.

On the technical chart, $HGX formed a head-and-shoulders top from Jan 2005 through May 2006 after having been in a multi-year uptrend. The distance from the head to the neckline suggests that, based on price patterns, $HGX has yet to go down to the 170 area. That represents a 17-18% decline from today's $HGX value of 206.12. I'm not sure that's realistic, given how low the P/E ratio of the homebuilders has gotten -- industry average P/E is 6.8! It seems too speculative to bet on either direction at this point. With such a low P/E, value investors have reason to buy. But the recent price action doesn't say yet that the downtrend is dead; there are lower highs amidst higher lows, forming a pennant pattern.


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