We’ve always paid close attention to the charts Beazer Homes and Citigroup, two companies that have benefited disproportionately in recent years from the Fed’s easy-credit policies. In the case of Citi, the loose lending promoted by the central bank amounted to a license to print money. And for homebuilders like Beazer, low mortgage rates and securitized debt markets have provided an equally potent boost, allowing would-be tenants to become homeowners, and existing homeowners to trade up to dwellings they could never have afforded in the days when local banks did most of the lending.

Because the U.S. economy has grown wholly dependent on credit and consumption, it’s likely that the shares of Citi and Beazer will get hit especially hard when interest rates begin to rise in earnest sooner or later, as they absolutely must. One might have expected this process to have begun quite some time ago, since the dollar has been falling more or less steadily for the last three years. But the banking and homebuilding sectors have continued to defy logic, remaining not merely buoyant, but ebullient in an economy that has produced virtually no income growth and relatively few new jobs.

Top Just Missed Target

 Immediately below, I’ve reproduced a weekly chart of the Philadelphia Bank Sector Index. What is most interesting about it is that the most recent top came within just 0.07 points of a hidden-pivot rally target at 104.84. Another of greater magnitude at 106.71 remains to be achieved, but we should train our attention on the lesser targets and trends, since the 5- and 15-minute bar charts have the ability to signal the onset of a bear market before it becomes apparent on the longer-term charts. We also note diverging stochastic tops  here that suggest a bull market about to run out of steam.

(Click on images to enlarge)

Most immediately, on the 15-minute chart reproduced below, the BKX is in a minor-cycle downtrend that projects to 101.64, or if any lower, to 101.13.  To those who are wondering whether this bellwether index is about to break down, I would suggest monitoring the two pivot closely, since an easy penetration of either would be a subtle but important clue that weakness is accreting below the surface. In any event, we’ll track the BKX more closely than in the past, since its eventual breakdown is destined to be the epicenter of the earthquake that impends. We happen to be long Citi calls at the moment, but some earlier profit-taking has reduced their cost basis almost to zero. With proper timing, we may be able to create an almost costless “strangle” by buying BKX puts at a minor-rally top, so stay tuned.