August 21st, 2012

Stock Market Recover Sidetracked by European Sovereign Debt Crisis

I think one of my most prescient posts was entitled Housing and Finance: Two Superimposed Crises and Bear Markets of September 17, 2010, almost exactly two years ago and just before the last mid-term elections.  The market had already bottomed the previous March and were breaking above what I saw as an inverted head-and-shoulder interim bottom.  As noted in the post,  there appeared to be the beginnings of a bottom in the housing market due to once-in-a-lifetime affordability.

Specifically, I envisioned the market being victimized for the first time in history by two economic crises: financial crisis hitting banks and other financial enterprises plus the housing crisis hitting consumers.  I suggested that before the market can advance to new highs, both these industry groups would have to bottom and begin moving higher.  The keystone of that post was the following chart on which I attempted to visually superimpose the impact of those two crises on the stock market:

Here we are, two years later, with the market having ground 24.6% higher from 1126 to 1420 today.  I wrote then:

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.

Unfortunately, I didn’t have sufficient courage to invest in homebuilders and missed out on the Industry Group with one of the biggest moves over the past twelve months, Homebuilders, at 75%:

We thought our Financial Crisis had been contained by the Fed’s first round of Quantitative Easing and that banks would begin their recovery however the effort was sidetracked because of the European Sovereign Debt Crisis beginning towards the end of 2009.  The recovery in the stocks of the country’s larger banks began to falter towards the beginning of 2010 and only now has begun to show signs of renewed life:

The “herd’s” big money flow again beginning to be directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.

It’s been a long, frustrating two years.  We’re facing another national election, this one even more important than the last.  Continuing to look at all the negative news continues to make our investment lives feel dismal.  Seeing the possibilities of some positive news for a change opens the mind to a totally different stock market future than the one we have become accustomed to.  I may be nothing more than an incurable optimist but that’s the best way to remain committed to the stock market and, ultimately, long-term financial well-being.

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