The market finished with a negative flourish yesterday, no doubt, and I must admit that the 230-point swing in the Dow made me stop and think, since I said this yesterday.
- The finish today will tell us more about the conviction and buying power of the bulls in this long-winded rally.
So what does the hard push to the downside yesterday tell us about the conviction and buying power of the bulls in this rally? Actually, not much. If the market had not swung so violently, I might see things differently, but someone has to give me a solid reason for the market’s decline, other than the words of Mr. Bernanke.
At first, the market liked what the Fed Chairman had to say – the Fed would keep purchasing as needed – but then he said this and the market went nuts.
- During the Q&A session, the chairman added that if economic improvement continues, they “could in the next few meetings take a step down” in the pace of purchases.
Yesterday’s sudden and rapid decline has nothing to do with reality. There are economic reasons the market could and maybe should be going down a bit. Today’s action reflects an appropriate movement for the mixed economic data, but for the market to go down so fast and hard just because Mr. Bernanke said what everyone already knew tells me the decline has little meaning, other than the sudden move caused a snow ball effect in an edgy market.
- Manufacturing slowed for a second straight month in May as weak overseas demand and government belt-tightening at home led to the sector’s most sluggish rate of growth since October.
Although the above means little to me in context, it is a reason the market would go down some. Then again, that would be balanced by the data below, which suggests the softness in manufacturing is not a tell-all, economically speaking.
- Sales of previously owned U.S. homes rose in April to the highest level in more than three years as housing continued to gain momentum. Purchases of existing houses increased 0.6% to an annual rate of 4.97 million, the most since November 2009, the National Association of Realtors reported
Now, the above could be scary or not. It could be scary in that the median home price is rising too fast, however, it is not scary in that it means the perception of wealth is on the rise, and that will have a positive effect on consumer spending.
- The median price of an existing home climbed 11% to $192,800 last month from $173,700 a year earlier, today’s report showed. Last month’s median price was the highest since August 2008.
It is also not scary because the reason the median price is rising so fast the fundamental of capitalism – supply and demand – is at work, and that will create the final push to a healthy US housing market.
- We do need to moderate the price growth. The only way for that to
occur is for more supply to come on to the market.
Absorb the meaning of those words – supply is short. Now, think back just to the beginning of this year. C’mon, it’s only five months ago. Remember all the talk about how the rush of foreclosures would add so much inventory to the market that the market would collapse?
Even though I could go off on that, I won’t. What I would rather get to is the reality that there is a shortage in inventory and that speaks to demand. Now, think about this. If you are a mortgage servicer and you are sitting on a foreclosed home or you are thinking of foreclosing, when would
be the best time to either sell the home or foreclose – when a lot of inventory is out there or there is declining inventory?
- Approximately 1.1 million homes remain in some state of foreclosure, while the shadow inventory, which also includes properties that are seriously delinquent and/or held as real estate owned by mortgage servicers, stood at 2.2 million units. While that’s down from the
January 2010 peak of 3 million, it still represents 9 months of supply andis worth about $350 billion.
My point is that although the median price is rising fast, it is not scary because there are homes
that will be coming onto the market from mortgage servicers, and those homes will add inventory, which will sate demand, to a degree, just enough to temper the rise in prices, but not enough to collapse the market. Add to this homebuilders are holding back on building just a bit to create demand pressure and you have a market beginning to operate on a sound fundamental basis. I hope you all took my suggestion some time back to look into the REITS and homebuilder stocks.
- Investor demand for housing assets has skyrocketed, taking homebuilders’ stocks to multi-year highs. KB Home, Lennar, and Toll Brothers, for example, are sitting close to their 52-week highs.
I have just one more thing for you to consider today – the gold trade and its relation to the market. Money is coming out of gold and it needs a home.
- As people hoarding gold in anticipation of hyperinflation gradually realize that they have things backwards, they are starting to sell and to put their money to work in more productive assets, such as stocks.
We just might be at the beginning of a years-long bull market, not the end, as some suggest. It all depends on the conviction of the bulls, ultimately. So where are we in the market today? I don’t know where it will finish, but right now the DOW has swung way back in the bulls favor and
the bears are trying to regain some footing. There is some real conviction going on.
Trade in the day; Invest in your life …
