September 16th, 2010

Housing and Finance: Two Superimposed Crises and Bear Markets

My first post on the positive aspects of the mid-term election year cycle was way back on January 28 when I wrote:

I usually focus on what the charts say without paying too much attention to statistical stuff like this but there may be something to the impact of politics on the market this year. I contend that there hasn’t been a mid-term election in quite some time with as significant a financial impact as the one this coming November.

As the campaign truly heats up after Labor Day, the issues and sides will become clearer. It will become even more evident that one party rule (Democratic) may end with the market breathing a sigh of relief. For the bull market to resume, there won’t be a better time than when it becomes clear that

  • Congress can make a new stab at economic stimulus, one that’s more favorable to business (i.e., shifting the focus from leading through punitive taxes to investment and business tax reductions and incentives),
  • Congress can begin a real attempt at reducing the deficit through true spending cuts rather than tax increases and
  • Obama will moderate his vision of change, out of necessity, to be more evolutionary than revolutionary.

So here we are, the elections are 47 calendar (32 trading) days away and market psychology seems to have turned around 90 degrees (still waiting for the last 90 degrees to make it a full 180 degree reversal … but that will have to wait until the neckline is broken). Cramer has turned bullish and so have the folks at Fisher Investments; welcome to the party.

It’s still early but the market seems to be behaving and acting according to script, just like we’d hoped. For the fourth day in a row we’re again bouncing just under the neckline identified early in August:

It’s taken a lot longer to get here but at least there were never any major surprises in the actions of the market or the background news and noise to cause us to waiver off our course. With the shift in sentiment that seems to be taking place, it certainly points to the market being able to clear the neckline this time [probably next week] making the price objective at 1150-64 certainly seems attainable.

What’s helped us get to this point without totally losing our mind, courage or our mood is that we had a plan, a map, to follow. Now that we’re here and about to cross into some uncharted waters it’s time to begin thinking about the next objective and about what is needed to help us get there. Hopefully, it’s not premature but here are the next challenges and logical next price objective:

I like to think in terms of images and the above graph clearly depicts what I see as two coincidental and superimposed Crises the country has faced. We often see them merged into one continuous stream of bad news but, in reality, there was a Financial Crisis (impacting business) that was preceded by Housing Bubble and Bust (impacting consumers). Yes, I know that one led to the other and one wouldn’t have happened had it not been for the first.

The deep 2008-09 crash could be directly linked to the meltdown of the financial system. That seems to have eased and been corrected. But the recession brought on by a yet broken housing market still lingers and needs fixing. For example, the unemployment rate in the construction industry is around 20%, substantially higher than and contributing significantly to that overall 9.6% (or whatever the true number is). When you add all the second derivative jobs (retail building supplies, real estate sales, furniture and appliance sales and manufacturing, etc.) the impact of the dismal housing market seems to be the major obstacle to consumer confidence, economic recovery and ultimately the stock market.

The reason the market appears to be bottoming again (the inverted head and shoulders) may perhaps be that housing is beginning to bottom and turn also. The number of foreclosures continues to rise (although at a lesser rate than last year) and the improved affordability index (historic low mortgage interest rates and closeout prices of houses) has not yet stimulated a pickup in the housing sales turnover. But a pickup may be around the corner [triggered by an up-tick in interest rates?]. Without a turnaround in housing, the stock market recovery will be short-lived.

Assuming this analysis to be correct, I see the next price objective somewhere between 1220 and 1164. The upper range is a horizontal trendline that connects the April peak with a host of past resistance and support in the same way as does 1164. Those two levels conveniently represent a new “trading range” that we’re probably going to be reading and hearing a lot about next year.

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  • Denali92

    We really seem to be following 2006. The price action is remarkably similar to that period, particularly the midcaps. IF I am right, then we should have a false break-out next week with one more move to 1084 – 1096 before we power higher the rest of the year.

    THANKS for providing your helpful perspective.

    -D

  • Anonymous

    Great Blog , i wonder what do you think on financials (FAS).
    Thanks for your coaching

  • Joe

    Looks like its building up some steam for another breakout to the upside, given that market doesn't fall apart. My time horizon on this, however, is 3-5 months, not days or weeks.

  • Anonymous

    tech bubble collapsed , it did not come back..housing construction not going to come back , unless immigration change..so we have to look for next bubble , not housing for sure??

  • Joe

    I told you what I thought the next, last bubble might be. It could be gold and other commodities when inflation starts to grab hold. (see May 10, 2010)

  • Anonymous

    Guru,
    Compared gold & spx last 30 yrs. gold from 300 to 1200, SPX from 120 to 1200.

    In that sense, gold may outperform SPX next 30 years( just a guess)

    oq

  • Anonymous

    Wakeup; SP500 new buy signal at 1130 today; going to 1320 really, really soon. Before the election but then sell on the news of a great Repub-victory Nov.2. Minnesotalee