A number of my indicators are suggesting that markets are getting way too frothy and a short-term top may be likely at any time. Given the recent internal strength, however, I would expect the downside to be rather contained.
On May 18th, we mentioned the breakout levels warranted adapting a Bullish stance. But given how extended the rally has become, new buying might be more profitibly done on a pullback. It is prudent to gradually leg into new postions, and use caution. Many individual stocks are reaching major resistance — or flashing technical sell signals — and should be exited on a trading basis.
Guy Ortmann, Technical Analyst at Capital Growth Financial, notes the following data points:
1.) The NYSE McClellan and 21 Day OB/OS are very overbought short term (+132 and +7581 respectively).
2.) The OTC McClellan and 21 Day OB/OS are also overbought at +107 and +3197.
3.) The 10-Day Arms index is at .95. It was below.90 yesterday which is a “yellow flag”.
4.) Our proprietary WST Intermediate Trend Indicator experienced a downward reversal yesterday from101.4 to 97.1. A three-point reversal suggests a change in the intermediate trend.
The upside is being driven by under-invested/under-performing hedge funds — they are the fuel propelling markets higher.
But we agree with Ortmann’s observations that yesterday’s action was "suspicious" as well. After the rally of the last few weeks, the markets saw their first real day of “distribution” in quite some time. The trading in the last hour resulted in a failed rally attempt with VOLUME INCREASING AS THE MARKETS SOLD OFF INTO THE CLOSE. Yesterday’s volume was the highest we’ve seen in the last 5-6 trading days.
As a result, it is our belief that “caution” is the key word for the near term.
UPDATE: The original version of this is still available on Real Money (subscription only). The 2005 article details was a pushback against the gloomers predicting a Nasdaq like collapse in RE prices. Instead, we detailed why this was a CREDIT (not a HOUSING) Bubble, and that while we should expect a 25-35% peak to trough drop in prices, it would not be a Nasdaq like 80% debacle. (35% was bad enough). We also noted that an extended period of high unemployment might make those numbers even worse.
In writing it, I decided to forget everything I thought I knew, and look at housing from scratch. Consider the factors that make Real Estate very different than stocks. Lose the assumptions, check out the numbers driving Real Estate, and see if Housing is truly the bubble everyone claims it to be.
Turns out there’s much less of a bubble than commonly believed by many people believe. While anecdotal evidence of regional excesses are interesting,
they doesn’t mean we are about to see home prices get cut in half (or worse) over the next few years.
There are three key drivers hardly discussed by pundits opining on the U.S. housing market “bubble”:
1) Purchase prices don’t matter to buyers — monthly payments do;
2) US has the fastest growing population of industrialized nations;
3) “Only 3% of all buyers sell their home in a year or less,” a survey found.
These issues, taken together, suggest that while Real Estate may be an extended asset class (i.e., two standard price deviations above historical trend) that doesn’t maeke it a bubble.
Of course, its interesting to note that a Playboy bunny gave up her modeling career to go into real estate speculation (mentioned previously here), it doesn’t mean the end is nigh.
Now if I can only figure out how these columns end up at Yahoo . . .
Don’t Buy Housing Bubble Propaganda
RealMoney by TheStreet.com, Thursday May 26, 2:04 pm ET
UPDATE June 12, 2006 9:39am
I just noticed that the Yahoo page expired; The full RM article is after the jump . . .
Category: Real Estate
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