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.

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.

Well, there were finally a couple of sales.  That's the good news.  The bad news is that one sold for $335,000, and, the other went off at $352,000.  The first one didn't look like a distressed sale since it appears from the public records that the sellers were move up buyers.  The second looks like a divorce sale.  Neither sales were the short sale available in the neighborhood.  That one is currently listed at $379,000, lowest in the neighborhood.  The other 7 active listings all had price reductions during June ranging from $5,000 to $24,000.  So apparently the rush to the bottom continues.  The 2 sales are going to set bad comps in the neighborhood and time is running out on the Selling season.  Anyone needing to sell is going to have to hurry.  I suspect we'll see some of the active listings de-list in September if they don't have to sell.  Disappointment is going to set in when they had originally listed their home for $425,000 and are seeing homes go off at $350,000.

Equity Indices

It's been a wild ride in the markets of late.

After getting the anticipated breakout, the Naz pulled in and made a stick save at the 50 day ema.  The subsequent rally was stopped in its tracks due to lack of progress by our politicians, bringing the market back for another test of the 50.  Failure there would be quite discouraging for the market.  The indicators are rolling over.  The stop should remain under the 50.  Long term trendline support comes in around 2700, as seen below.  That would be a good spot to establish long positions.

Longer term the market continues to hold its uptrend.  The key pivot is the 50 week ema around 2670.  A good long entry would be near 2700 with the stop at 2665.  The indicators are weakening which may push the market below the trendline.  Perhaps once we get a debt ceiling deal the trend may become clearer.  Until the trend becomes clearer

REIC stocks

With many single family home stats to be released this week, it's a good time to revisit the Real Estate Industrial Complex (REIC) securities.

 The Homies don't look to be in very good shape.  After breaking their uptrend the Builders fell back setting a potential neckline at 17.  After catching a bid at the 200 day ema they rallied back up to the trendline setting a potential right shoulder.  Since then the XHB has pierced its 20 & 50 day ema and looks destined to test the neckline.  A break below targets 15.5.  The indicators are still pointing down, making a break look probable.  News stories suggesting home buyers are passing up new homes in favor of used homes certainly aren't help the builders prospects.

 In the meantime, many of those not buying/selling a home are turning to updating their current homes as shown in the Residential remodel index.  This is ancecdotally evident in my neighborhood where a slew of construction trucks can be seen on any given day.  Apparently the remodelers aren't shopping a Lowes however.  I't been locked in a downtrend since April.  It sure looks like it has a date with destiny at 20.5.

The giant, Home Depot, is fairing better.  It might be a long candidate at 34.8, but I'd keep this one on a short leash.

Lumber is in a nice basing pattern.  After rattling around the bottom of the base in May it has recently broken up.  The top of the base is the target, 320.  Of note, the paired trade suggested in May has worked out nicely (long Lumber, short Plum Creek).  PCL has a little more downside, but this trade needs to be lifted soon.

 The REITs have been unable to gain much upside traction since May.  They look to be forming a wedge.  A decent break down out of the wedge, below 60, sets the stage for a test of the 200 day ema around 56.5.  The indicators are pointing down, suggesting a likely break down.

Weyerhaeuser has a decent chance to hold support at 21 creating a pretty objective long entry.  A stop below 20 creates a pretty good risk reward situation.  In the meantime, it sports about a 2.8% yield.

Lastly, interest rates continue their downward trend.  1% on the 5 yr looks like the target.  With 2 yr rates in the PIIGS countries over 15%, the safehaven bid in the US Notes looks alive and well.  Now if we could figure out the debt ceiling resolution...but that's another story.
This week's Single Family Starts & Sales data may have an impact on the above securites.  I'm waiting with baited breath ;o)