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.

Mortgage Rates

The drop in interest rates is spurring homeowners to refinance.  According to the Seattle Times:

"Homeowners race to refinance as mortgage rates plunge"

The article includes the following chart on local mortgage rates:

 

Mortgage rates are closely tied to the 10 yr interest rate which are shown below.

Rates have been falling since February, and, have recently picked up speed in a flight to safety move.  This week rates have fallen below the 2.5 year base that had been building and are challenging the panic lows set in 2008.  Looks like they have additional room to the downside.  It would take a move back into the base (above 2.5%) before a bottom in rates could be called.

Market Indices - R.I.P "The Ripper"

After yesterday's "Rip your face off rally", the market retraced nearly all the gains.

The S&P 500 had a whipsaw day yesterday, but finished with a bang climbing nearly 72 pts in the last hours of trade.  Today retraced nearly 50 of those points.  It's interesting to note that thru this whole bear market any upside action has been capped at 50 on the RSI and the 20 period ema on the short term charts.  Typical bear market action.  Four potential 20 period ema entries (noted at the red arrows above) have occurred so far.

Looking out a little further the S&P has some support at 1050.  The indicators are still heading south.  With all the whipsaw going on the safest course is to see how this shakes out.  Waiting and watching...

Market Indices - Panic at the Disco!

Yesterday saw another rush for the exits in all market indices.  Equity markets have taken a very dim view of the bureaucrats ability straighten out the economies of the world.

 The Naz has been pummeled for 15% since the end of July.  Yesterday it lost important support at 54, setting a double top.  With the indicators extremely oversold, the Naz is set up for a "rip your face off rally."  54 would be tough resistance setting up a reasonable spot to go short, should the market get that high.

The longer term chart clearly shows the trendline break.  The Naz is currently sitting on the 200 week ema which might be a good spot for the "Ripper."

The S&P 500 has fared a little worse than the Naz (down 18%) due to have more financials included in the index.  The longer term indicators are nearing oversold territory suggesting the worst may be over for now (or at least not as violent selling).

One of the purported reasons for the sell-off was a downgrade to the US's credit rating.  Apparently the flight to safety encouraged investors to shrug off the downgrade and buy Treasuries which were up on the day.  Interest rates have been on a steady downtrend as seen in the chart above.  10 (1%) on the 5 yr is the bottom of the base.  A bounce from here would set up positive divergences on the indicators.  Long at 11 with a stop at 9.5 would be the play here, however, that still leaves a potential 15% loss.  Not necessarily a great risk/reward scenario.

The US Dollar also got a lift yesterday, contrary to what might be expected from the downgrade.  The lift might be temporary as it still looks like the USD is in a potential bear flag.  The long term indicators have been recycling for the last 6 months without much pick up in price.  The USD will also face some resistance at the 20 week ema near 75.2.

Surprisingly, the Euro looks to have better upside potential.  It is setup in a potential triangle.  If the indicators unwind a bit more 139.5 would be a good spot to go long, with a stop at 137.9 setting up a good risk/reward trade.

Lastly, the asset that expects all currencies to devalue, gold, continues on a tear.  It has broken out again into uncharted territory. 

Neighborhood Update

This is an update of my tracking of a specific neighborhood in my area, in an effort to gain further insights to the current state of residential real estate market.  The last update is here.

Things are starting to get interesting.  Since the last update there have been 4 new sales.  All were for a higher price than the prior 2.  Sales prices ranged from $359,000 to $425,000 (the prior 2 went off at $335,000 and $352,000).  The sale at $425,000 boasts "extensive upgrades."  In the meantime, there were 2 new listings.  That brings the total active listings to 10, of which 2 are short sales.  The lingering short sale has once again had a price reduction down to $350,000.

There appears to be some consistent themes arising from my neighborhood review:

Short sellers continue to aggressively pursue sales by reducing price.
Houses attractively priced, well appointed & move in ready attract buyers.
The good news for this neighborhood is that there is probably only one more house on the market that has the potential to come close to the $335,000 low ball price.

I think the implications here are that in a neighborhood where all the homes are very similar:

It might still be hard to make a flip work.  If you picked up the $335,000 home, to resell it costs 8%, plus you need to recoup the costs to upgrade it.  So, with a purchase price of $335,000, plus $30,000 in paint, carpet, granite, stainless steel, etc and 8% in closing cost, you would need to sell at the $425,000 top price to make 6.25% cash on cash, on the flip.  A successful flip would require some sort of angle to avoid the listing fee of 3%, by being a Broker or something else.  Also, if the purchase could be leveraged by a hard money lender, your return could be substantially higher.  For example, if you put 20% down on the purchase, added $30,000 in upgrades, saved 3% of the selling price, and, sold for $425,000 the return would be closer to 25%.  The big risk is that home prices could fall another 5% between now and next Spring.  Flip opportunities should be better pickings in early Winter.

On the other hand, there appears to be great opportunities for resourceful home buyers.  If a potential home owner does their homework and works the short sale/foreclosure market (not for the faint of heart) they could try to score the $335,000 home, do a remodel and make it the $425,000 home, therefore, protecting themselves from any 5% further decrease in value.

Lastly, this exercise has been a bit of an eyeopener for me on the state of info available on the internet.  None of the popular real estate websites (Redfin, Zillow, Realtor) have completely reliable information.  I have had to compare/contrast info from all these sites, as well as, conduct drive by inspections in the neighborhood to feel I had all the info.  I'm sure there is a lesson in there somewhere.

Market Update

Due to the fast moving deterioration in the market, another update is in order.

 After yesterday's promising looking hammer, the market is reversing hard this morning taking out the hammer.  It's looking like a clean break out of the 6 month basing pattern.  All moving average support has been taking out.  The market is severely oversold so a bounce can't be ruled out, but the longer the market stays below the base, the feebler the bounce would be.  Tomorrow's Payroll report may be the catalyst.  We shall see.  Defense continues to look like the best offense in this market.

The longer term picture shows the trendline break looking clearer and clearer.  Barring some big bounce on tomorrow's payroll report, this will look like a pretty ugly weekly candlestick.

Market Update

It sure didn't take long to get some feedback on which way the new trend may be going.

 The Dow cracked its long term trendline.  There might be a little support at the moving average, but the indicators are looking very bearish.

Zooming in a little bit the trendline break can be seen a little easier.  The daily indicators are getting very oversold.  I would have to suspect there is going to be a little rally soon which could be used to lighten any equities positions people might be holding.

 Similar situation on the S&P 500, although the trendline break looks a little more convincing. 

Taking a closer look, there looks like a head & shoulder pattern in play.  Typically, a break of the neckline (shown in green) needs to occur before the pattern can be validated.  Volume has been heavy on the recent down move adding credence to the H&S pattern.  If the pattern works, there should be a backtest of the neckline followed by a bigger downside move.  If you are long, that is where positions should be dumped and shorts put on.  Watching closely for further developments.

Market Indices

This is going to be an interesting week for the averages.  Some sort of resolution to the debt ceiling issue will need to appear, and, employment numbers are to be released Friday.

 The Dow continues to trade within its 6 month trading range.  For the year it's up around 4%.  It's getting pinched between the 2+ year upwards sloping trendline established in 2009, and, a shorter term downtrend from May.  A break of the longer term uptrend would represent a pretty strong sell signal.  Up and out above the shorter term downtrend would look like more of the same.  The indicators are looking pretty weak suggesting caution is the order of the day.

Same goes for the S&P 500.  The patterns are getting tight here suggesting a significant move is imminent.  Either way it goes, the patterns should get a backtest providing the opportunity to position.  In the meantime, cash continues to be King.  The Naz continues to look like the strongest part of the market, but, it can't run alone.