As you may have figured out by now, there is a certain degree of irrationality in the markets. When the S&P500 went as low as 672.88 on 03-09-09; there was actually no good fundamental reason for this low. However, the herd mentality drove the major indexes pretty low in early March. Stocks were being treated as an asset class and most folks were getting rid of those assets. This, I believe was completely irrational selling backed by fear (and Obama's bad news messages and uncertainty) - and no one, I mean no one was excited about the market at that point.
Well, now we have the complete opposite. We managed to manufacture an increase in auto sales backed by the cash-for-clunkers program and domestic auto makers are sending a false signal that things are now okay and the consumer is spending again. Be careful! This is another small / temporary bubble and will deflate by October of this year when we will eventually run out of clunkers. Keep in mind that there are also some folks that are also buying (getting into debt actually) who did not bring a clunker with them to the dealers. In short, this program is simply getting folks into debt with the highest unemployment rate in recent history (http://www.bls.gov/news.release/empsit.nr0.htm).
So what are we to make of the current market highs? Just like we manufactured the lows of early March, we have now manufactured the highs of Summer 2009 and the party and excitement will be over soon as folks are chasing performance at this point with no real fundamental reasons behind it. All of the data that we have received recently (i.e. housing bottom) which may indicate the start of a recovery is not real at this point. We are on a sugar high and manufactured high market self-esteem and the low point is coming shortly.
Look at this in a more simplistic fashion: Supply and demand, supply and demand and more supply and demand. Buyers will dry up shortly and sellers will have a feast from these levels. See major indexes graphs below and remember you heard it here first!:
DOW - http://investertech.com/tkchart/tkchart.asp?stkname=$DJX0X&wt=0&tp=0
NASDAQ - http://investertech.com/tkchart/tkchart.asp?stkname=$COMPX&wt=0&tp=0
S&P500 - http://investertech.com/tkchart/tkchart.asp?stkname=$RUT0X&wt=0&tp=0
Enjoy trading!
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2 comments:
Interesting analysis. One question: What underpins your view that the increase in house sales is temporary?
Andrew Chalk on Linkedin.com
Andrew,
We have to start with individual bankruptcies (the highest in July '09). The consumer is still hurting and some will continue to still lose their homes to foreclosures. Bank owned properties are at an all-time high and these banks still have to find a way to put those homes back in the consumer hands... Wait a minute! What consumer? The average Joe out there cannot afford to buy a home right now and the 14MM+ unemployed Americans are losing their homes or getting ready to lose their homes and simply cannot buy a home without a job.
The peak / high of the housing bubble was very high and the actual low has not been established yet. So, any purchase activity by the few with acceptable credit and some investors bargain hunting may falsely appear to be a trend reversal.
Do you actually know how long it takes for a homeowner to actually lose a house to foreclosure? There are a large number of poor folks out there prolonging their inevitable deaths - thinking that they will actually save their home and in the end they will actually go bankrupt and lose everything anyway. There are thousands of projects at a complete halt here in Florida with no new hope of getting anything started any time soon - the light at the end of the tunnel is very far yet... What you are seeing out there is a few folks taking advantage of the depreciated value of homes and very low interest rates right now.
Let's also mention that interest rates cannot continue to stay this low for too long. And you know what happens to the value of a home when interest rates go up... In short, the housing bubble is not over yet - we still have a second phase of the problem that most people just refuse to talk about or simply ignore it completely.
PS. I am not even touching commercial real estate - dead at this point and getting worse by the minute...
Regards,
Jose
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