Market Update

The market closed the 3rd quarter with a thud, that followed thru to start the 4th quarter.

Since I posted the above chart on August 1st when I suggested "cash continues to be King" the markets have been taken out behind the woodshed.

The August trendline break has triggered a significant sell off.  After 8 weeks of range bound trading the S&P is breaking out of its triangle.  Unfortunately, it looks like a measured move is setup.  The target for the measured move is about 950 which would coincide with a 61.8% retracement of the rally that began in 2009.  There is some pretty decent support between 1020 and 1050.

On the monthly chart, a sell signal has been generated with the MACD going negative in September.  This supports the target of 950.

New Home Activity

After looking at Used Home Activity, it's time to see how the New Home market is faring.

 New home sales continue to be depressed due to the intense competition from the used market.  The new home market has seen a decent summer averaging over 20,000 and comparing favorable to last years market.  Unfortunately, at this pace, new home sales for 2011 will be the lowest on record.

 Looking at sales from a longer term perspective, the last couple of years have been record lows.  It's looking like another year of about 300,000 sales.  Certainly a far cry from the bubbles top at 1,400,000 sales.

Fortunately, builders have refrained from starting many homes resulting in a months supply of around 6.

The bright spot in the new home market is the lack of inventory.  Eyeballing the above chart, it looks like there are about 60,000 finished homes on the market and about another 60,000 under construction.  If sales can maintain a 20,000/month clip it won't take too much to whittle away at that inventory.  That would set the stage for builders to focus on presales which are a much more profitable product for them, rather than specs.

Used Homes update

The monthly housing statistics have been recently released.

 Inventory levels continue to drop as they have for most of the year.  The months supply of homes on the market also continues to drop from the spike high seen mid 2010, however, it still remains well above the 6 months mark considered a more "normal" market.

 Sales have seen a small uptick recently and remain near the longer term average of 5mm sales/yr.

August saw pretty decent demand with 500,000 sales as the selling season winds down.  That was the best showing in 3 years.

According to the Case Shiller index prices have been basically flat since 2009.  All those who have been calling for a further 20% decrease in prices have sorely disappointed.  Certainly the continuing drop in mortgage rates have buffeted the fall in prices.

All in all, the market appears to be better than most would have you believe.  The supply of homes on the market has continued to decrease, demand for homes (sales) have held up reasonably well, prices have been stable (at least not freefalling) and mortgage rates have been dropping.  Should the unemployment rate continue to stay at the 9+% it has been at for the last two years I believe we are about 5% in price away from a buyable bottom.

Charts from Calculated Risk.

S&P 500

After the markets imploded in late July, early August the S&P 500 has been locked in a wide range between 1120 and 1220.  With the S&P currently trading around 1170, it's pretty much in the middle with no edge here.  Buying near 1120 and selling near 1220 is the strategy until there's a breakout one way or the other.

Equity Indices

The certainly wasn't impressed by the Feds lack of action yesterday.

As seen above in the Mid-Cap index, the market is poised to break out of it's bear flag.  The 50 day ema provided significant resistance to the upside and now all that's holding the market together is the bottom side of the flag.  The indicators are rolling over and heading south suggesting the flag will break down and out.  There is possible support at the year's low, 77.  The flag itself measures down to 73.  Unfortunately, if this turns out to be a measured move, the possible low is much further below.

The longer term outlook as seen in the Naz shows the market getting rejected at the neckline.  A follow thru to the downside measures to about 2100.  That's about 15% lower from here.

Seattle SFR

Time for a look at how the Single Family Residential market is faring in Seattle.  On the demand side:

Closings have been pretty stable since March averaging over 1500/month.  That's a stark contrast to the slow down in closings last year after the expiration of the tax credit.  At this point stable is good since that would put closings at the highest level since the 2007 meltdown.
On the Supply side:

Inventory also remains stable averaging near 8,000 units, the lowest amount in years.  That puts the month's supply a little over 5, which is pretty good.  With the selling season almost over seasonality should kick in resulting in lower inventory.  The typical pattern is for homeowners who failed to sell earlier to take their homes off the market.  The remaining inventory would be from motivated sellers.  Just eyeballin' it, inventory usually drops 30% into yearend.  That would take inventory available for sale down to 5,600 units at yearend.  It seems to me that the inventory would consist primarily of bank influenced properties (REO's/short sales) with owners (banks) attempting to shore up their 12/31 financial statements.
The balancing mechanism between supply and demand is price:

So far, the bounce in prices appears to be due to seasonality.  Since 2008, the selling season bounces have been; 2008 - lasted 1 month and increased 3%, 2009 - lasted 9 months with no price appreciation, 2010 - lasted 4 months and increased 3%, 2011 (ytd) has been 4 months with 3% appreciation.  So the increase this year, at this point, looks seasonally driven.  After the selling season appreciation in 2008 prices fell for 10 months resulting in a 17% decrease.  In 2009, prices fell for 5 months for a 5% decrease.  In 2010 prices fell for 8 months for a 9% decrease.  It seems the key to the market will be how prices behave during the slow months.

Taking a closer look at recent prices it is evident that the lower priced homes are taking the brunt of the decrease.  Anecdotal information suggests that well priced nice homes are being snatched up quickly, often resulting in multiple bid situations.  Over priced POSs are being passed up resulting in lower listing prices driving prices down.  As disappointed would be sellers take their homes off the market during the slow season I would expect the remaining motivated sellers to aggressively price their homes to move.  The result will be that prices will drop, with some amazing values appearing in the lower end of the market.  Investors and Flippers would be well advised to scour the market for these upcoming gems.

Charts from Seattle Bubble.

Long Term Investing in Equities

It doesn't really matter what your investment adviser has been telling you.  Continuing to make monthly contributions to you retirement account doesn't necessarily result in higher returns.  However, it does make your adviser more money since they are basically paid based upon how much "Assets Under Management" they have.  They get paid by the mutual funds they have clients money invested in.  When is the last time you got a call from your adviser suggesting you should be in cash?  Why would they...it takes money out of their pocket.  Take a look at this long term chart spanning from 1996 to today:

The Green dotted line approximates today's close.  That line extends back to 1999.  If you invested your funds in a market index fund back in 1999 and added to the account each month (dollar cost averaging)  you would be break even.  12 years of investing, and, nothing to show for it.  On the other hand, if you sold your index funds near the prices identified by the MACD (shown below price, ie red circles), and, bought near the green circles, you would have made significant progress towards increasing your wealth.  The message is that blindly throwing money into the market isn't the best way to increase your wealth.

Currently, the monthly MACD hasn't gone negative and the 200 month ema hasn't been broken.  Should both of those turn negative 700 is the next target.  Let's hope that doesn't happen.

Naz - Hit with an Ugly Stick

Poor economic news walloped the market at the end of the week.

The market showed promise early in the week backtesting the neckline at 2600.  Bad ISM & Employment numbers triggered a sharp selloff.  Bear market rules for the RSI are in effect with 50 acting as a roof.

The poor showing at week's end left the market with an ugly looking black candlestick, with a long tail off the 2600 neckline identified above.  The indicators are in oversold territory but show no signs of reversing.  The Naz has some support at 2340.  A break of 2340 measures down to 2100.

S&P 500

The S and P broke north out of its base.

The indicators have had a chance to unwind.  1200 looks like a good support to the downside.

On the daily chart, it can be seen that the index is entering a congestion area highlighted by the orange circle.  That is where the 50/200 day ema's are lurking (and pointing down) with the neckline just above.  1260 will be tough resistance.  If the indicators can unwind from being oversold a little more, 1255 would be a good spot to go short, with stops at 1265.  With a couple of big economic reports due this week (ISM and Payroll) it should make for an interesting market.

The weekly chart shows the resistance levels noted on the daily chart.  The best thing about the weekly chart is that the indicators are trying to curl north.  It make take another run down to get the indicators flushed out.  In the meantime, the oversold indicators make another "crash" look unlikely.  Maybe more downside, but not a "crash."

S&P 500

After the the recent swoon in the market, the S&P 500 has been bouncing around trying to form a base as seen on this short term chart:

While the swings have been large, the average is currently sitting in the middle.  The S&P 500 is going to need to break out of the base before it turns directional.

The indicators on the daily chart are all pointing north, suggesting some momentum is possible to the upside.  Lurking on the upside are the moving averages which will provide some significant resistance if there is an upside breakout.  On a breakout, the move would target 1240, with the top of the base providing support.

The weekly indicators have reached oversold territory and are trying to turn up.

Real Estate Stocks

As suggested back in July, Real Estate stocks have taken a pummeling.

The Homebuilders have fallen over 27% since mid July.  The head & shoulders pattern exceeded it's target, showing just how weak the builders have been.  Currently, the builders are oversold and showing some positive divergences.  They are due for some sort of bounce.  If they can clear the 20 day ema, 16 would be the next target of interest.  Anything below 13 would trigger a stop.

Likewise, Lowes exceeded its target to the downside, breaking below 21.5.  It now faces stiff resistance at 20.75.  That would be a good spot for a short position if the indicators unwind a bit more.  Should the 50 day ema come down closer to the bottom of the base (in green), that is where the stop would go.  The short would first target, then 15.

Lumber faded after its short lived breakout and fell out of the base.  It's currently sitting on support at the 200 week ema, but faces stiff resistance at 240.  The indicators are getting oversold, but will have to jump back into the base to have any significant upside potential.

The REITs got punished after falling out of the wedge way exceeding the target of 56.5, trading down to 49.  Its had a nice bounce, but some serious technical damage has been done.

Weyerhaeuser failed to hold the trendline and hit the stop.  If it can jump the 20 day ema it should near 19.5.  The indicators are coming up from being way oversold with some positive divergences in place.  This looks like a good long with a stop at 15.3.  Also, the current dividend yield is 3.6%.

The rate on the 5 yr note continues to plummet.  It has exceeded the target of 1%, hitting .9%.  Resistance is now at 1%.  The rate is going to have to jump back into the base quickly if rates are going to rise significantly.  The indicators are getting oversold, but the safe haven bid remains.  I guess the lowest they can go is 0%.

Used Home Sales - July

Used home sales dropped about 3% from last month.

Used home sales appear to be hovering around a seasonally adjusted rate of about 5mn/yr, where they were in the late 90's.  It's interesting to see the effects of the ill conceived buyers credit had on the markets.  As would be expected it juiced sales by pulling forward demand.  The net effect appears to be no net effect on homes sales, but it cost the government considerably.

Inventories didn't change much, but have been trending lower overall since 2008.  There's a long way to go until they match the low levels of the early 2000's.  The seasonal decrease into the Winter should bring inventories down to around 3mn.  That should be a welcome improvement.

The Months of Supply of used homes remains elevated at about 9 months.  The effect of the buyers credit is also evident here.  As sales dried up after the credit months supply skyrocketed.

July used home sales came in around 450,000.  Used home sales show more seasonality than the new home market, and, the market is heading into the slower part of the season.  Used homes sales ought to average closer to 350,000/month for the next 6 months.  I suspect many disappointed "would be home sellers" will likely delist their homes helping relieve some pressure on inventory levels.  The remaining sellers will consist of those with motivation (ie Lenders).  Even though inventory levels may remain stable I would expect further pressure on used home prices.

Speaking of lenders, it is interesting to note that the number of mortgages entering the 90+ day category has been shrinking this year.  Delays, hassles and stalls have prevented many of the homes actually in foreclosure from entering the marketplace, but at least the pipeline is getting smaller.  Additionally, the GSEs have been selling more homes than they have been taking back which is a good sign, even though, they still hold a ton of homes.  Hopefully, it is moving in the right direction.

All charts from Calculated Risk.

New Home Activity - July

New Home Sales remain low.

For the last year, seasonally adjusted new home sales have been the lowest they have been since the 1960's.  Stiff competition from the used home market continues to impact new home sales.

Consequently, there has been little reason for builders to start new homes, as seen above.  New SFR starts have been wallowing at historic lows since 2009.

With a very low number of starts, and, a few sales, builders have been able to drive inventories to very low levels. 

Even with low sales numbers, the low level of inventory has driven the Months of Supply to nearly 6 months.

27,000 new homes were sold last month, barely beating 7/2010 levels.  However, with 61,000 homes currently in inventory, it wouldn't take much to bring inventory levels down to bare bones.  With seasonality swinging into the slower part of the year, the big question is what would it take to spur additional sales?  If sales can maintain at the 20,000 per month levels that were achieved last year, it would seem like inventory levels will continue to drop and months supply ought to get comfortably below 6.  Should that happen I don't expect a "building boom" but it would certainly support new home prices, and, improve builder's profitability.

Market Update

I imagine attendance at 6 Flags was down dramatically over the weekend as investors had their fill of rollercoasters during the week.

As shown on the Dow, wild swings occurred everyday on the index.  The Indices ended on a high note breaking out of the trading range, and, followed thru yesterday.

Last week the Indices put in a nice tail ending the week almost unchanged.  The weekly indicators are nearing the bull market bottoming levels, but recent activity has been looking starkly bearish.

The daily chart shows the S&P exceeded its H&S pattern target of 116.  In such a pattern, the index should bounce back and touch the neckline at the breakdown area which is around 126.  Besides the neckline resistance there is a confluence of ema resistance near the neckline (in the orange circle).  With the indicators curling up, the index has a good chance to hit the backtest area but face significant resistance and be turned back.

Construction Spending & Employment

Not much change in Construction Spending since the last update.  What's interesting is that Calculated Risk added Public Construction Spending to this month's chart.

Public Construction Spending was on a steady uphill climb since the inception of this chart.  A steadily producing economy allowed the Gov't spend and spend on construction projects.  Once the financial crisis hit, stimulus was the order of the day.  What's surprising is that the bump in public construction spending was pretty pathetic.  Most of the stimulus was directed towards financial entities (and it is very hard to discern the benefits that resulted) so investment in long lasting infrastructure improvements were passed over.  Public construction spending peaked in 2009 and has tapered off since then.  The prospects for future public construction spending look pretty glum.  "Super-Congresses" have been formed to determine ways to reduce the cost of government.  Tea-Party enclaves are adamantly against more spending.  It appears unlikely that any significant stimulus will be coming to pay for public construction spending.  It's worth mentioning that a  favored method of financing public construction spending, Build America Bonds, expired on 12/31/2010.  Even if taxpayers were willing to pay for additional public construction spending, a preferred method of financing it is gone, not to return.  I expect public construction spending to fall to early 2000's level of $200bn ($75bn from today, about 25%).
Ignoring the spending explosion on residential construction between 2004 and 2007, residential construction spending is down about 40%.  Non-residential is also down 40% from the peak. 

The following chart shows employment trends in the construction industry.

This chart shows all construction related employment.  The number of jobs in the construction industry have fallen by over 2,000,000 since 2007.  It appears that the job losses have been fairly even amongst residential & non-residential (spending is down about 40% for each).
So, what's the outlook?

Residential starts might have stabilized.  New home inventories are scraping along at rock bottom.  It's hard to imagine housing starts dropping much further.  On the other hand, Apartments are in hot demand.  Apartments started this year will provide construction spending over the next year and a half. 
I don't expect much improvement in non-residential spending over the next year, until employment increases, but it is already 40% off peak spending.  Non-residential contruction spending could fall another $50bn from current levels, unless employment improves.  But I suspect a lot of the employment impacts have already been incurred.
If public construction spending decreases by $75bn, can residential spending increase by over $75bn to absorb the workers displaced by decrease in spending on public projects?  I think so.  I'm not suggesting a hiring binge, but I believe the construction industrie's drag on employment is nearing an end.

A Tale of Two Towers Update

That didn't take long.  As noted previously, Scnitzer put 1918 Eighth up for sale in May after securing an anchor tenant.  It has apparently been bought by JPMorgan.  Being 94% leased up it drew a big crowd of potential investors.  The strategy remains the same, investors are seeking Class A leased up properties.