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In
This Edition... |
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It was a wild
week last week, not just on the economic front, but for the stock
market as well. The shakin' and stirrin' was largely spurred by economic
and housing market news, though options' and futures' expiration (it
was a triple-witching) stirred the pot pretty well too.
Given that most
of
the economic news didn't matter, and the fact that expiration
week largely skewed the markets bigger trend, it will take some special
care to cut through the noise and dig up the data that actually matters
to you. That's what we've done below though.
For this week,
we've got three major themes on our plate .... (1) what we really need
to know about housing starts and building permits, (2) where we stand on
the productivity front, and (3) what the market's true undertow is at this
point (based on breadth and depth).
Before we forget
though, there's also a blog entry from last week you'll want to scour -
"We
Have New Sector Leaders, & They're Here For a While". Some
of the market's best performers for the foreseeable futures may be names
you never saw coming.
Let's just dive
in.
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Building
Permits, Housing Starts Down |
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Yep,
just as the 'experts' figured, the end of the homebuyer tax credit was
the beginning of the next real estate implosion, right? Building
permits fell from 610K in April to 547K in May. Housing starts fell from
659K to 593K. Woe to all investors and real estate owners.
Before anyone
starts banging the death drum, there's more to the story you need to know....
the rest of the story the media never explains adequately.
 Yes,
starts and permits dropped between April and May. Their plunges were 10.3%
and 10.0%, respectively.
That's it?
Yep, that's it. While a 10% decline of anything isn't chump change,
it's hardly a disaster of the proportions the pundits were preaching. That's
not even the important part of the "rest of the story" though.
What the nay-sayers
failed to mention is that in every year since 1970 - with the exception
of 1981 - starts and permits have peaked in April, May, or June. That's
right - the permits and starts action that occurred last month has only
been occurring for the last forty years.
It's a point
well worth making (and understanding), as far too many perma-bears have
already stood up on their soapbox and told us the end is nigh. The end
of modern civilization may well be around the corner, but the April-May
dip in building permits and housing starts does NOT serve as evidence
of such. It's actually quite typical.
To be fair,
starts and permits are still at multi-decade lows. They are trending
higher now though, with 2010's peaks coming in better than 2009's, and
2009's lows coming in better than 2008's. It's still ugly to be sure, but
as it stands now, the trend shows improvement... whether you
want to believe it or not.
Here's a
full-screen (and longer-term) chart of the permits and starts.
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Capacity
Utilization, Productivity Up |
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We've
mentioned before that two of the most accurate and helpful economic indicators
are capacity utilization and industrial productivity.... both published
in tandem by the Federal Reserve. And by 'helpful', we specifically mean
'helpful to investors', in that there's a stunning degree of correlation
between the market's long-term trends and the economic data's long-term
trends. [Conversely, it has little bearing on short-term market
trends, so it's important to make that distinction.]
 With
that in mind, you should know that capacity utilization went up last
month (to 74.7%), as did industrial productivity (by 1.2%). Ten
of the last eleven months have shown improvements on both fronts, and
the one odd month was merely flat... February of this year.
As was the case
with the building permits and housing starts data, you can adopt whatever
interpretation you like of the capacity and productivity data. To deny
that the trend isn't a positive one, however, is simply a denial
of factual evidence.
As for us, like
we said, the correlation between the direction of these two data sets (we
plotted the actual productivity index below rather than the percent change)
is
too strong to dismiss now; we'll maintain our bigger-picture bullish posture
until these two trends change.
In the meantime,
keep in mind these are long-term indications that will look errant
when short-term market volatility kicks in to the downside. Don't sweat
it - that's not the trend we're worried about when considering this data.
Here's a longer-term
chart of the capacity utilization rate and industrial production index,
as compared to the S&P 500. It's here where the correlation really
stands
out, and fully explains why we're still leaning bullishly.
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Breadth
and Depth Teasing Us |
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Though we remained
bullish for the long-term throughout May's disruption, we were never in
any denial about the short-term weakness. However, we did figure
we'd get a renewed short-term bull signal by this point. So far though,
we haven't.
We'll not rehash
the breadth (advance/decline) and depth (volume) tools we use to make our
short-term buy/sell calls. We've had the discussion about a gazillion times
over the last three months. We'll just say that advancers and decliners
as well as 'up' volume and 'down' volume are far better indications of
the market true trend than the market's apparent, 'overt' trend is. In
fact, that overt trend is often a coin toss, at best.
 Instead,
we simply look for more bullish breadth than bearish breadth, and more
bullish depth than bearish depth, to say we're back in a short-term or
intermediate-term uptrend. And, to make sure we're actually looking at
'trends', we compare moving averages of all that data. The bullish
moving averages on the nearby chart are green, while the bearish ones are
red (and our apologies if you're color-blind).
Well, as it
turns out, we didn't see those bullish crossovers last week after
all. We were on approach to do so, but a shake-up over the last
two weeks snapped these trends before they could fully develop. Thus, there's
no official switch to short-term bullishness.
That said, note
that the trend-line crossovers are still within reach, and could signal
this week with even just a modest amount of bullishness. We'll let
you know when/if it does.
And some may
ask, isn't this strict adherence to a trading strategy a little silly?
On
the surface, yes, but in reality, this kind of adherence
to a proven strategy will make and save us much more than if we took a
discretionary approach as to when to take the signals or not. Those nickels
and dimes add up, whether it's gained, or only saved.
Here's a
full-screen chart of the NASDAQ's breadth and depth trends.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
