Housing Roars, While Financials Sleep

New home sales rose last month to the highest level in more than a year, largely due to strong activity in the South and the new home buyer tax credit possibly coming to an end last month (was extended to April 30,2010).

The Commerce Department said Wednesday that sales rose 6.2 percent to a seasonally adjusted annual rate of 430,000 from an upwardly revised 405,000 in September. Economists surveyed by Thomson Reuters had expected a pace of 410,000. The report tracks signed contracts to buy homes, rather than completed sales.

The surge in new home sales was driven entirely by a 23 percent increase in the South. Sales fell about 5 percent in the West and Northeast, and fell 20 percent in the Midwest. Despite the lack of certainty about the tax credit that buyers faced in October, sales were up 5.1 percent from a year ago, the first yearly increase since November 2005. The median sales price of $212,200 was almost even with $213,200 a year earlier, but up almost 1 percent from September's level of $210,700.

By scaling back on construction, the building industry has brought the oversupply of homes on the market under control. Currently, there is 6.7 months of supply of new homes for sale, which is a drop from last month and down from last winter's peak of more than a year.

Used home sales were reported to have rose 10 percent from September to October, the biggest monthly increase in a decade. Along with the tax credit, buyers are being attracted by low prices, low mortgage rates, and slightly higher personal income.

Financial Stocks Have Not Seen Much Action

Stocks in the financial sector have been settled down for several months after seeing high volatility during the market downfall of 2008. Financials recovered in early 2009 and a experienced a rally that lasted well into the Fall of 2009. Interest in financial has died down and they have been trading generally in a choppy sideways manner since the late August, early September period.

After analyzing financials there are some that show critical areas, and deserve your attention. The chart for the Financial Select Sector SPDR ETF (NYSE:XLF) is a general picture of what many of the bank stocks and financials look like. It has been trading in a very tight range recently, and the 20- and 50-day moving averages have practically turned sideways. This narrow range should be watched closely, because a break in either direction would lead to a continuation move and be the mid-term direction for financials.

Bank of America Corporation (NYSE:BAC) looks very similar to XLF but there is one apparent difference. While XLF respected the lower bounds of its trading range, BAC actually broke under the range in late October. However, there was no follow-through, and BAC was able to climb back into the base. This often ends up turning into a bear trap, but BAC would have to first clear the narrow trading range highlighted in red before the bears get nervous. A move below the narrow range could lead to a full-fledged breakdown and a test of the 200-day moving average in the $12-$13 range.

JPMorgan Chase and Co. (NYSE:JPM) is another financial stock that may be in a critical area. JPM has been gradually rolling over, and has begun to set lower highs. However, it is important to note that JPM hasn't broken support either, and remains entrenched in its current base. While the pattern is beginning to resemble a head-and-shoulders topping pattern, the pattern will not be valid until JPM closes beneath the neckline (highlighted in blue). The whole area between $40.50 and $42 is the level that needs to hold for JPM on a pullback.

Capital One Financial (NYSE:COF) is another financial stock with an interesting chart. COF has been showing some weakness, but it is still in it's main uptrend and is being held by several support levels. It attempted an upward breakout in October, but the rally failed. COF is now building a base and is riding the 50-day moving average. A move below the 50-day moving average would show greater weakness, and could provide the catalyst needed for a larger correction downward.

Putting It All Together

Although volume and trading in financials has been declining for a few months, it might be time for them to start seeing some action. While they are showing some near-term weakness, the fact that the markets continue to be in an intermediate uptrend must be taken into account when considering a financial stock investment. Volatility has diminished singnificantly in the financials, and it is likely the next move in the group will be large. As investor confidence in financials is determined this should provide an idea of where the major indices may be headed as financials can sometimes lead the markets.