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In
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In a blog entry
from earlier this week, we took a sobering look at the state of the housing
markets. As optimistic as investors - or even non-investors - are
about a rebound in the real estate arena, the numbers are still nothing
to get excited about. Yet, there's actually a strong (i.e. investment-worthy)
revival within the house and home industry. We'll look at this trend and
some specific companies below.
After that,
however, we're going to have our third and final discussion surrounding
the breadth and depth discussion we started a couple of weeks ago. This
is the 'grand finale' of the series, and after today you'll be equipped
with an effective strategy for timing your entries and exits.
First
though, a quick recap of what you've missed in the blog since the last
newsletter:
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The
New 'Real Estate Investment' |
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The
details of the data are packed into the blog entry linked above, so we're
not going to rehash them here. Let's just say the housing and real estate
market's woes are far from over... despite what some may want
to believe. Conversely, just because the real estate market isn't recovering
doesn't mean the market can't...... again despite what some
may want to believe.
And therein
lies the rub, but also the opportunity.
 In
simplest terms, new homes sales just hit record lows, existing home sales
are falling again, the average home-sale price is just a hair above multi-year
lows after reaching multi-year lows in January, and housing inventory
levels are rising again (which will put downward pressure on prices). Were
it just one or two problem areas, it might be dismissible. When nothing
is
going well for real estate though, it's time to start acknowledging that
maybe the housing market still has years of excess to bleed off - even
if it's stabilizing now (which it somewhat is).
So does this
mean the consumer is still dead?
That's the funny
thing. The consumer is far from dead. Consumer spending has actually
been on the rise over the last six months when compared on a year-over-year
basis. Granted, comparing the last six months to consumer spending in late
2008 and early 2009 is no real contest. But still, the numbers don't lie
- consumers are buying again. In fact, credit availability actually
increased in January, for the first time in over a year. Even more telling....
saving levels (as a percent of income) are declining again.
 So
if consumers aren't spending it on new homes, where are they spending
it? A little bit of everywhere, but particularly on their homes - not
new or bigger homes, but on what goes in their homes.
Kirkland's (NASDAQ:KIRK)
saw a 7% increase in sales, and a 47% increase in profits last quarter.
Williams-Sonoma (NYSE:WSM) increased last quarter's y-o-y revenue by 8%,
while earnings improved by triple-digits. Bad Bath & Beyond (NASDAQ:BBBY)
has grown its top and bottom line for three straight quarters, and analysts
expect the company to make it four in a row when they announce results
on April 7th.
The list goes
on and on too. While almost all industries are seeing better days, the
home decoration industry is seeing more than its fair share. And,
it's a trend that could last a while.
That's great
for the home decor stores, yet miserable for homebuilders and real estate.
The more consumers spend to upgrade and furbish their existing home, the
more reason they have not to buy a new home.
Most cause-based
trends like these fizzle fairly quickly. If this one was going to though
(and
if real estate was going to start rebounding), it likely would have
started to do so by now. This disparity probably points to a more permanent
change in consumer's mindsets. They may now be willing to throw down a
few hundred bucks on a whim for a new piece of furniture. It may be years
before they thrown down a few hundred thousand bucks on a new house
though.
In the meantime,
the home decoration industry is loving it. Investors are too.
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Breadth
and Depth Clues, in One Simple Tool |
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OK, we've spent
the better part of the last two weeks laying out the idea that breadth
and depth data can be very telling of market trends, and market
reversals. We started with four pieces of data on March
19th - the NASDAQ's advancers, decliners, bullish volume, and bearish
volume. The goal was to spot trends for each data set as a stand-alone
indication.
We followed
that up on March
25th, simply by starting to compare the NASDAQ advancers to its decliners,
and comparing the NASDAQ's up volume to its down volume. This made interpreting
the data much simpler - the stronger trends become visually dominant over
the weaker ones, and we can draw bearish or bullish conclusions.
But wouldn't
it be cool if there were a way to combine all of this great breadth and
depth information into one single tool?
Well, there
is. It's called the Arms Index (after its developer Richard Arms).
You may also see it referred to as the TRIN Index, or Trading Index. Like
the breadth and depth information we've discussed so far, the Arms Index
is also exchange-specific..
 Great,
but
what is it? The nearby image shows the formula. In simplest terms,
it's a comparison of comparison.... a ratio of ratios. It compares the
ratio of advancers to decliners, to the ratio of up volume to down volume.
Confused?
Don't
worry - there's a way of explaining the concept that will help the formula
make sense.
In simplest
terms, the Arms Index shows balance or imbalance in the market's undertow.
The advancer/decliner ratio can be wildly bullish, but as long as the up
volume/down volume ratio is equally wildly bullish, there is balance...
and the trend is indefinitely sustainable. When breadth and depth are in
a sustainable balance, then the TRIN Index hovers around 1.0.
The market runs
into problems though - and reversals - when breadth and depth are
not commensurately bullish or bearish. Said another way, if the degree
of selling volume doesn't jive with the number of stocks that are actually
falling, then something's got to give - such imbalances can't persist for
very long. In cases of imbalanced breadth and depth, the TRIN reading scores
will be well above or well below 1.0 [as much as 1.2 or more, or less than
0.8, depending on the situation]
Clear as
mud? Great, because we have one more curve ball to throw at you.
As was the case
with daily up and down volume, and the daily advancers and decliners, the
raw, daily TRIN data itself is too erratic and untelling to use.
We have to smooth it out with a moving average. As for which one to use,
that's the coolest part of all - it can be adjusted to suit a trader's
desired holding period. Some traders use as few as ten days in their TRIN
average, while some investors who seek longer holding periods may use a
50 day average; It works in al timeframes when interpreted appropriately.
Now, we've explained
all of this in excessive detail so far so we could adequately explain
the current Arms Index chart, and what it's suggesting is around
the corner. Let's just say the bulls should be worried.
Since we prefer
longer holding periods, our interest lies in a longer-term moving average
of the NYSE's TRIN data (the NASDAQ's long-term TRIN averages aren't
as predictive as the NYSE's, though the NASDAQ's short-term TRIN
averages are very predictive). And, while most chart analysts would
simply look for 'too high' or 'too low' levels for this moving average,
we've found more precision in spotting extreme TRIN readings by wrapping
the moving average in Bollinger bands. Some might consider all the work
to be overkill; we don't see anything that gives us a legitimate edge as
excessive though. [Sorry, the settings for all of these indicators are
proprietary.]
 And
what is our NYSE-TRIN chart telling us now? It's approaching levels
that tell us this recent bullishness is dangerously imbalanced - and
getting worse every day. It's not quite there yet, but the last two
times the NYSE's TRIN moving average got this low (on a relative as
well as on an absolute basis), the market stagnated for two months.
Those two instances are marked on the chart [the TRIN average is purple,
and the Bollinger bands are green. The beginning of the TRIN 'sell' signals
are marked with red arrows.}
And frankly,
stagnation was a best-case scenario. The further back you move on
the chart, the more you'll see how persistent low NYSE TRIN levels lead
to problems. For reference, here's a full-screen chart of the same data
going all the way back
to 2006, and here's one spanning from 2002
through 2005. While you'll see a few exceptions, mostly you'll see
low TRIN readings in front of weeks of tepidness and non-movement, if not
outright pullbacks. The tendency is too strong to ignore this time around.
On the flipside,
the one thing we've also observed over the years is a lack of precision
with the Arms Index hints. Sometimes the pullback develops immediately;
sometimes it takes weeks to materialize. Sometimes the selloffs last for
week, and sometimes only for days. So, it's not surgically precise. That's
why we use it in conjunction with other tools.
Nevertheless,
the TRIN trend is a concern now for obvious reasons.... the bulls are
running out of steam, and they may not even know it. Odds are better
than average they'll be paying the price sooner than later.
We didn't look
at them today, but we can fine-tune the bigger-picture TRIN clues by adding
the short-term moving average of TRIN data to the mix. Now that the explanation
part is done, we'll can start doing that. Stay tuned.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
