The National Association of Realtors report today showed that the number of existing homes for sale is higher than at any time since 1986.
Economics 101: Remember what happens to prices when supply exceeds demand…
I had CNBC on for background noise this morning as I got ready for work. Blah, blah, blah. The usual case of many words saying nothing. Then my BS radar started going off and I walked over to the TV.
The guy being interviewed was from the Business Round Table and was bragging about how all the largest companies were members and that, for 2006, their capex (CAPital EXpenditures) were projected to increase for over 50% of the companies. “Great for the American Worker,” he said. He was very upbeat, confident and polished.
Had the host left it at that, the propaganda spot… sorry, the interview would have ended and We The People would have felt all warm and fuzzy about our futures being in the capable hands of such benevolent corporate citizens.
Then the host, Carl Quintanilla I believe, threw the curve: “How much of this capex is actually being spent in the United States?”
Pause. “Um.. er.. We don’t keep those kinds of statistics”
“Well then, how much of these companies’ production would you say is from their overseas operations?”
“Over 50%.”
Good eye, Mr. Journalist. It is a beautiful fact that large corporations are going to increase their capital expenditures. You gotta ask where and why to get to the ugly part.
I was just discussing with some folks yesterday the fact that my Wal-Mart indicator was still holding. I had to go there the evening of Dec. 26, after having heard all day long on the news how “packed” the retailers would be. I waltzed in there right at the 6pm “rush hour,” got my stuff, and only had to say ’scuse me about 10 times (i.e. it wasn’t busy at all). I had a hard time getting out, but only because they had about 25 of the 40 registers closed.
Today I’m getting concerned. “Experts” are emerging who agree with me that the market looks like it’s topping. That’s the first sign I’ve seen that maybe it’s not!:-) The article also mentions to watch out if 1249 fails on the S&P. Hmmm, where have I heard that before?
The treasury yield curve inverted last night for the first time in five years. I’ll get a little more into the mechanics of it in a separate article, but put simply, the 2-year note was paying a higher yield than the 10-year note. Think about it for a moment. What if your bank offered you 5.25% on a 5-year CD, but only 5% on a 10-year CD. It would be pretty obvious that something was amiss.
Treasury yields aren’t quite as simple as CD yields, but the inversion is still a sign that something’s not as it should be. It’s the free market’s bright red arrow pointing to the fact that our economy is not just the foaming good news we see on the box.
If you follow market news regularly, you’ll quickly notice that there seems to be no such thing as bad news. Take the following Reuters article, for example.
NEW YORK (Reuters) - An inverted yield curve in the U.S. Treasury bond market, historically a harbinger of looming recession, is no longer the curse that analysts fear and some say its impact on the dollar could even be positive. [my emphasis]
What was bad is good, and what was good is still good! As the Church Lady used to say, “How conveeenient!”
All baloney, of course. The culmination of excess money supply, historic levels of personal debt, and the real estate bubble is likely to be very painful, and for those who keep clicking their heels and ignoring the flashing signals, quite a rude awakening.
The sideways action in the overall markets still has them chopping around and just being noisy. Great for the market makers to collect a nice holiday bonus off of small traders who obsess over individual stocks and don’t understand why they keep getting whipsawed.
Not much use for trend-following indicators in the current conditions. Moving average bowties and MACD will get you stopped out over and over in a sideways market if you just trade them mechanically.
Oscillators (stochastics, momentum, etc.) will give good signals if the parameters are set just right and as long as the chop continues. If you’re trying to trade these, however, be ready to ignore the overbought/oversold signals the moment the trading range is broken.
Remember, none of these indicators predicts the future! They only help you to see when probability is likely to be on your side, and your trading skill and money management do the rest. A stochastics reading of 90 means nothing if a stock has just broken out of a range.
Indicators serve as filters of general conditions you should be able to see on the chart. Look at overall price and volume action. If you can’t see one of Dave Landry’s Big Blue Arrows, don’t let all those other indicators become Rorschach blots and cause you to see something that’s not there.
What I’ll do here is chill, enjoy more time with my daughters, watch for the occasional day-trade setup, and wait for a new trend to emerge before I start actively trading again.
As for the market, the S&P is still stuck in the 1250-1275 range I referenced here. Will the “Santa Rally” break us out of that range? I certainly don’t know. If it does, I’d trade it with really tight stops into January, suspecting a fade.
Otherwise, I’ll be watching for things to get really active starting the first week of January, and will be looking to day trade the most volatile stocks in the direction of the market break. I’ll trade in either direction, but the news is so “unbearably” positive right now, I’m anticipating a drop.
Once again I’ve heard the puppets inside the box in my living room babbling on and on about how home prices may flatten, how the rate of price increases will probably slow, but how We The People need not worry, because after all, in nominal terms, home prices have virtually never fallen.
How big of a real estate bubble might we be dealing with? This article from The Economist gives an overview:
…the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries’ combined GDPs.
Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America’s stockmarket bubble in the late 1920s (55% of GDP).
In other words, it looks like the biggest bubble in history [emphasis mine- Ed.].
We have all types of banks and fly-by-night mortgage brokers pressuring us to repeatedly refinance and “cash-out” equity on our homes as fast as it builds. What do we usually do with that money? Put it on those unbearable credit card balances, which we incurred by living beyond our means.
However, that temporarily-lowered balance only stays low temporarily, because our behavior hasn’t changed. Not only are we not encouraged to exercise prudence, we are actively encouraged to keep spending. The credit card balances run right back up to their maximum on top of the (newly-increased) mortgage balance. But since our homes will never lose any of their value, this is the “smart” way to finance our consumption, right? (And after all, the home interest is deductible.)
Um, yes. That’s the way the modern world works. Until it doesn’t. At some point, that airplane can’t continue to climb more and more steeply, and it stalls.
We have such short memories. To an extent, that’s human nature. But to bury our heads in the sand and chant “there’s no place like home” (yes I know) is to ask for one of the rudest surprises in our lives.
True, average home prices have not significantly declined on a year-over-year basis in recent history.** But that “recent history” only goes back to 1963. No World Wars. No Great Depression. No pandemics. No currency crises. No budget-busting health care expenses. What does that tell us about the future? Not much.
For those of you who have been following the equity markets since before that bubble, some good examples of reading too much from past patterns:
“Folks who go to work for this company know that they can depend on a steady job and a good retirement in exchange for their hard work because this company has never laid off an employee in its history (over 100 years), even during the great depression, and has never cut its benefits.”
This company was IBM circa 1990. In 1991, IBM began a series of massive layoffs and benefit reductions that hasn’t ended to this day.
“You can buy this company’s stock knowing that you are investing in one of the strongest, surest companies in the world and even if the price declines, you will be guaranteed a healthy dividend return because this company has never cut its dividend in over 125 years, even during the great depression.”
This company was AT&T in 1999, just before it completely eliminated its dividend and proceeded to disintegrate.
What did these “nevers” tell us about these companies’ futures? Was there a single guest on CNBC disputing the assumptions the “experts” were making? Not one. How cozy were we all with the idea that the past somehow implied something about the future?
***
By virtually anyone’s measure, the housing market is overextended. The monumental expansion of the money supply over the past few years has made credit so loose that folks have become accustomed to overspending, and the rapid rise in home prices has been one of the most obvious results. That easy money did what the Greenspans and Bushes intended, that is, it headed off the recession that was due the first part of this decade. That recession wasn’t skipped, however. It was only postponed. To be paid at a later date– with interest.
If the “experts” are wrong, and home prices actually do start to decline, how might one best prepare for the coming surprise? If you’ve got equity built up in your home, leave it there. Start exercising a little self-discipline and live within your means. Pay your bills, including more than the minimum on the credit cards, and then what you have left is what you have left. If that’s less than you need to maintain your lifestyle, you can’t afford that lifestyle, no matter what the TV and the neighbors (and the bankers) tell you. Take personal responsibility.
Don’t want to experience the pinch of actually living on what you make, take responsibility for your debt, and delay the gratification of impulsive purchases until you can actually pay for them? I’m afraid too many of us don’t. We are too addicted to the needle-and-spoon of easy credit to stop now, no matter what our better senses tell us. If so, there’s more than a pinch coming. And more than a recession.
The faces on T.V. say inflation will stay moderate, interest rates will stay tame, the fiat dollar will retain its value, and our ever-increasing home equity will continue to finance our spending zeal. And they’re right– it will… until it doesn’t.
In case you were camped out in an igloo in Antarctica and missed the news, 12 companies were replaced in the Nasdaq 100 Index (the NDX) yesterday. “So what?” you ask, “Why should I care?” To most traders, I’d simply say: Remember where the price of your QQQQs comes from. Eleven of the twelve new stocks, well, whatever. But then there’s Google…
Why is Google such a big deal? Not simply because it was added to the NDX, but because it has gone from “not in the index at all” to “the third most important company in the entire index” in one fell swoop. The other eleven companies are down in the lower end of the “100,” as you may expect.
Not convinced yet that this change is worth noting? Consider the following facts (couldn’t find a listing, so I did this crap with a hand calculator):
Here’s what I meant by “the NDX is market-cap weighted, sort-of.” Back in the old days (the ’90s), it was purely market-cap based. Unfortunately, that meant that only five stocks accounted for 60% of the index’s movement! Nasdaq decided to modify their formula, but how they modified it is “proprietary,” which I suppose is highbrow for “nun yo’ bidness.” Here’s how Nasdaq describes the NDX:
The NASDAQ-100 Index is a modified market capitalization-weighted index. The value of the Index equals the aggregate value of the Index share weights, also known as the Depository Receipt Multiplier (?DRM?), of each of the Index Securities multiplied by each such security?s NASDAQ Official Closing Price (?NOCP?), divided by Adjusted Base Period Market Value (?ABPMV?), and multiplied by the base value.
…got that? Yeah, me too. Anyway, the point is: if you trade the Qs, if you trade options on the Q’s (don’t we love ‘em!), if you trade other NDX stocks that get arbitraged against the index, start paying more attention to GOOG! Look at that chart– this thing’s gonna move the NDX (especially if it breaks), which is gonna move the Qs, which could start a chain reaction. Forewarned is forearmed. Cheers.
Are we in the middle of a classic “2b top” on the S&P 500?
Like most passionate traders, I have a veritable library of market-related books. In what is, pound-for-pound, one of the best ones ever written, Trader Vic: Methods of a Wall Street Master, Vic Sperandeo illustrates the most useful and (not coincidentally) simple chart patterns, as well as giving invaluable advice on psychology and money management– the two main reasons most of us fail at acheiving long-term success in trading. 
In his section on the basic double top (he calls it a 1-2-3 double top if I remember correctly), Vic describes a variation on the 1-2-3 where the second top momentarily pops above the first one before failing. This head-fake he dubbed the 2b top, and can be an even stronger signal than a regular double-top.
Enough chatter– here’s “what I’m lookin’ at.” In the chart below, notice the S&P had a near-term high on 11/23/05 at 1270.64. It then descended to two almost perfectly even lows on 11/30/05 and 12/1/05 at 1249 and change. Finally, it spiked to 1272.89 (the 2b top) on 12/6/05, and failed back below 1270 the same day.
An agressive trader could have gone short on the break of the 2b (12/6) bar:
(Note: A less aggressive play would be to wait for a break below the 11/30-12/1 level of 1249.)
I’ve included here a 5-day, 60-minute chart to show exactly where the aggresive short would take place. The bottom of the 2b bar was right at 1263, which was broken just after the open on 12/7. The stop would have been set at the top of the 2b bar, or 1273, for a maximum loss, or “R,” of 10 points.
NOW, if we’re practicing prudent money management (and we all do, don’t we?), we might follow the practice most commonly employed by Dave Landry and others, and close half our position at “1R” while at the same time moving our stop to breakeven. We’d now be in the cushy position of having locked in at least a 5-point gain on our entire position, with half the position still in for a free ride.
If you’re unfamiliar with some of these concepts, fear not. Read the blogs of some of the folks who do this full-time (see my sidebar for a couple), read all the books you can get your hands on, and practice, practice, practice. I’ll fill in as many of the blanks as possible as the site evolves. I’ve still gotta get my old website stuff up, and then there is that living thing I’ve gotta try and fit in somewhere. 