Thursday, November 16, 2006

Market thoughts

What's with housing? After all, almost every analyst agrees that if housing falls apart (the so-called "hard landing"), the US will sink into recession. So again, what's with housing? Studying all the major homebuilders charts, we note the initial collapse (which was really a crash) which took place from mid-January 2006 to mid-July 2006. Then we have the sideways movement into November. And most recently, a rally to the highest levels since the July lows.

How would I interpret this? First, the surest action in the stock market is the recovery (often as much as 50%) following a crash. The homebuilding stocks could be in that type of recovery situation. But beyond that, I believe the action of the homebuilders is telling us that if there's to be any real trouble in housing, it's probably won't occur until well into next year. In other words, if there's to be truly bad news in housing, it could be months or even a year or so away. I think that is what the stocks of Ryland and KB homes are telling us by their actions.

In the meantime, the stock market itself appears to be saying that it sees no immediate trouble. Yes, the dollar could be in trouble, yes, housing could be in trouble, yes, the US deficits are horrendous and the economy itself could be in trouble -- but NOT YET.

Consider this -- stocks are overvalued and the dividend yield on stocks (those that provide any dividends) are ridiculously low. The trend is up, and it will remain up until proved otherwise.

For months the talk has been ugly. Huge deficits, warnings from leading authorities, housing disaster in the making, consumers ready to cut back, the dollar on the edge of a cliff, an inverted yield curve, declining leading indicators -- yet the stock market was looking the other way. The obvious play, based on the warnings, was to short the market. But those who shorted the market had their heads handed to them. At the same time, tens of thousands of puts expired worthless.


Blogger seamus said...

Jobs good. Incomes good. Lots of want ads; people in housing industry finding jobs elsewhere. gas prices down 40% from peak. The housing market may drop without a major impact on the economy.

10:31 PM  

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