Housing, sentiment diverge on market signals

U.S. Housing, Bulls/Bears Ratio give market odd outlook

With most participants absent from the stock market this past week as the lure of some down time and eggnogs beckoned, some interesting numbers were nonetheless revealed -- the trend in U.S. home prices and Bullish/Bearish market sentiment.

After peaking in early 2006 U.S. Home prices entered into a steady decline until the first quarter of 2009 at about the same time the stock market made a significant low. Since then housing prices inched somewhat higher. But last week a report from the Standard and Poor’s Case-Shiller Home Price Index folks revealed that housing prices may have embarked on yet another down leg to extend the bear market in housing. One commentator suggested the resumption of house selling could be the beginning of a “double dip.”

So what do housing prices have to do with the stock market?

When the housing market, a key economic indicator, peaked in 2006 the S&P Index was about 20% away from the highs of October 2007. Of course, the year-and-a-half lead time in housing was hardly a prescient timing tool to exit the stock market. But housing weakness was nevertheless interesting since the market generally tends to lead the economy and not the other way around as was the case in this last cycle. And some would suggest that the most recent economic contraction is not over yet. Thus the resumption of selling in one of the key components of the economy – housing.

Will that selling renewal act as a drag on equity prices since investors feel less flush? Could be. With some sectors of the housing index hitting new lows for the move, housing weakness certainly won’t act as a stimulus to investor well-being.

The other set of numbers we found revealing was Bullish/Bearish data from Investor’s Intelligence. Simply put, the B/B Ratio is now back to levels not seen since October 2007, February 2010, and April 2010 at a major top, a short-term high, and an intermediate top. At the same time, the number of bears reported is the inverse of numbers recorded at the November 2008 and March 2009 long-term lows. So, from these numbers one might be led to conclude that the market is vulnerable on at least the short to intermediate-term trend, let alone the Major Cycle.

Some might also argue that in the early stages of a bull market there is going to be a rapid escalation of bullish sentiment by of folks getting more bullish. Thus some false readings in the B/B ratio that could develop to suggest investors should be selling positions rather than simply holding or adding to positions which would be the correct strategy.

Good point, but the upmove in the market that was initiated in March of 2009 is now nearly two years old, is not “new,” and has continued to be spurred higher on weak volume for the past nine months. In fact, we have seen Cumulative Volume in none of the key indexes surpass the late April plot highs, despite strength in ALL of the key indexes except the Dow Jones Utility Average to new peaks for the move.

But, and this is the giant caveat, since price is the ultimate arbiter of profits and losses there is no denying the net, upward bias of bids since the July 2010 intermediate-term lows, let alone since the March 2009 price bottom. And this overall strength is despite short-term pullbacks that occurred in June/July 2009, January/February 2010, and then a larger pullback that lasted from late April 2010 through early July 2010 and which was followed by strength to new highs for the move. But it is the latter correction that still has us worried. All of the buying from that March 2009 low through the January 2010 high was “good buying” to the extent volume increased with prices. But then the bloom began to come off the rose. Prices rallied until late April 2010, but CV has never recovered, despite strength.

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