Bank Indices Set Multi-Year Highs Pre-Earnings

NEW YORK ( TheStreet) -- My headline from Friday's trading is the 21.5 basis point rise in the yield of the U.S. 30-year bond yield to 3.708%, the highest since August 2011. Home builder stocks declined, while banking indices set new multi-year highs.

The catalyst for this dynamic is what Wall Street called an improving jobs picture. I disagree with this interpretation and continue to call the labor market, the 'Obamacare Job Market', or the shift to part time employment from full time employment so that employers do not have to pay for health care insurance under the mandate of the Affordable Care Act.

How else would you describe a rise of 360,000 part time jobs and a decline of 240,000 full time jobs? Because of this quickly changing labor market the real unemployment rate, known as U6 rose to 14.3% in June from 13.8% in May. The percent of full time jobs fell to 47%.

A related problem I recently read about is that real seasonally adjusted median household income declined from just above $56,000 when the recession began at the end of 2007 to $51,500 in today's part time labor market. This is another way to say that the cost of living is rising on Main Street USA.

Meanwhile on Wall Street I recently viewed a chart that showed NYSE margin debt at levels not seen since before the tech bubble burst in March 2000 and in mid-2007 before massive stock market decline that lasted into March 2009.

With the 30-year yield at 3.708% the ValuEngine valuation warning intensified with 73.0% of all stocks overvalued, 37.1% by 20% or more.

Against this backdrop, home builder stocks have shifted from a leadership role to being stock market laggards. The PHLX Housing Sector Index (175.14) ended last week below its 200-day simple moving average at 179.85.

Home builder stocks had been in an upside leadership roll in 2013 with the housing index testing a multi-year high at 210.01 on May 20, up 22.6% year-to-date at that time. Since then the housing index declined to a low of 168.79 into June 24. As U.S. Treasury yields began to rise mortgage rates spiked, which is a potential cloud for the housing market. At the low on June 24, this index dipped into the red for the year. On July 5, the housing index is up just 2.2% year-to-date and is 16.6% off the high.

There is only one buy-rated home builder according to ValuEngine and that's PulteGroup ( PHM) ($18.59), which mirrors the performance of the housing index. Pulte has a weekly value level at $17.92 with a quarterly pivot at $19.37 and monthly risky level at $21.69.

Recent housing data has been positive including, the National Association of Home Builders Housing Market Index, which rose by eight points to 52 in June, above the neutral 50 mark for the first time since April 2006. The NAHB projects that total housing starts would top the million mark this year for the first time since 2007. This progress has been trumped by the higher interest rates.

It appears that investors like bank stocks, both big and small in this higher yield environment.

The America's Community Bankers Index ( ABAQ) (210.96) set a new multi-year high at 210.96 on July 5 and is now up 23.6% year-to-date. Even a better performance has been logged in by the PHLX KBW Banking Index (63.94) is now up 24.7% year to date with the July 5 multi-year high at 63.94.

Over the next two weeks most banks will report their second quarter earnings reports. I question whether earnings justify bank leadership at this time given tight net interest margins and slow loan growth. In the first quarter 2013 total real estate loans were down $36.7 billion sequentially. Comprising this reduced lending, residential mortgages on the books of the banks declined $18.3 billion, nonfarm/nonresidential real estate loans fell about $300 million, construction and development loans declined $2.1 billion, and home equity loans fell $16.0 billion.

All 24 components of the money center/regional bank index are rated hold, which indicates that revenue misses or cautious guidance could end this leadership.

On July 2 I wrote, Trading Buy Rated Community Banks where I provided my buy-and-trade strategies for six buy-rated community banks. In addition to these specific banks consider the ETF SPDR S&P Regional Banking ( KRE) ($35.93), which consists of both regional banks and community banks. The daily chart shows an overbought condition with the ETF above its 21-day, 50-day and 200-day simple moving averages at $33.29, $32.63 and $30.14. My monthly value level is $34.10 with a weekly pivot at $35.17 and semiannual risky levels at $36.15.

Chart Courtesy of Thomson/Reuters

I still give the finance sector an equal-weight asset allocation rating. If you would like to review all sector ratings, here's my post from July 2, Sector Ratings Set Asset Allocations. Following monthly benchmark revisions the number of buy-rated stocks fell to 114 from 176 with the number of sell rated-stocks down to 57 from 143. Given this balance the finance sector of 2954 stocks keeps its equal-weight rating.

On July 5 I wrote, Alcoa and 'Too Big to Fail' Banks Key Next Week's Earnings and profiled two community banks and two of the four 'too big to fail' money center banks. By the end of next week we will have heard from all four of the biggest banks and 14 community and regional banks. By then we will know whether or not bank leadership can be sustained.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.