Chart Courtesy of StockCharts.com
The NAR is not predicting a huge rebound. Instead, the association's Chief Economist isforecasting a stable scenario for the overall market, with the existing home market faringbetter than new home sales.
According to the NAR's 11-10 press release: "Existing-home sales, expected to fall8.6 percent to 6.47 million this year -- the third-best performance on record -- areprojected to be essentially even in 2007 with a 0.6 percent decline to 6.43 million.New-home sales, likely to drop 16.8 percent to 1.07 million in 2006, are forecast to fallanother 8.7 percent next year to 975,000, largely due to a significant reduction inconstruction by builders."
Indeed, the NAR is predicting a significant slowing of the new housing market noting:"Total housing starts this year will probably fall 10.6 percent to 1.85 millionunits, and then decline another 11.8 percent to 1.63 million in 2007."
Timing Is Everything
The big question for investors remains simple. When is it time to get back into housingstocks?
As usual, the answer is not necessarily straight forward, and depends on an individual'srisk tolerance and time frame.
The housing stocks tend to move together asa group. Thus, it is not as important to choose which one of the builders to take a chanceon, as it is to time the entry into the sector.
Here are some key thoughts to ponder:
1. Investors with high risk tolerance and deeper pockets can start building longterm positions in selected builder stocks.
2. A good way to choose which one or two to buy is to see which of the stocks inthe group has had the best bounce since the bottom. Pay special attention to the volume inthe stocks, as that's the clue as to how much institutional money is actually moving in.
3. At this stage of the game, if the stock (s) chosen move sideways, you're doingo.k. The key is to remain patient.
4. Investors with low risk tolerance and less deep pockets should wait until themarket gives a better signal of a rising trend.
5. Take the extra time to do your homework, and look beyond the obvious.
Housing Sector Stocks
Investors interested in the housing sector should also dig deep into home builders as wellas related stocks. A simple way to get a glimpse into the nuts and bolts of the group isto inspect the charts of the Housing Sector Index components.
A quick look at four well known building stocks, Ryland (NYSE: RYL), Toll Brothers (NYSE:TOL), Centex (NYSE: CTX) and Hovnanian (NYSE: HOV) gives us some clues.
Chart Courtesy of StockCharts.com
All four stocks bottomed in July 2006. Ryland has bounced back the best with a 33% gainfrom the bottom. Toll has recovered 23%, Centex 18% and Hovnanian 20%.
Yet, all four stocks are below their 200 day moving averages, which means that the longterm trend remains to the down side.
The Housing Sector Index (HGX) as the chart above shows, is at its 50 day moving average.But a look inside the index shows that the strength in the index is not so much from thehome builders, but from Sherwin Williams (NYSE: SHW), the paint manufacturer.
Chart Courtesy of StockCharts.com
Indeed, Sherwin Williams is a momentum stock at this point, having doubled in price sincebottoming out in February, and moving ahead of the rest of housing related stocks by leapsand bounds.
Yet, a look at the financials for Sherwin Williams does not show huge growth. Revenues andearnings jumped in the first two quarters of 2006, but have since flattened, again givingcareful growth investors reason to pause.
Other stocks in the housing sector, such as Home Depot (NYsE: HD) and home furnishinggiant Ethan Allen (NYSE: ETH) have just begun to bottom out.
Chart Courtesy of StockCharts.com
Once you've looked at the breadth of the action in the entire sector, consider your risktolerance, and your time frame, you can make better decisions.
Conclusion
The market seems to agree with the forecast of the National Association of Realtors.
The leading stock in the home building sector is Sherwin Williams, a company that makespaint. That suggests that a narrow band of the home improvement sub-sector is a moreviable sector of the market for now.
The fact that Ethan Allen and Home Depot are not moving aggressively higher suggests thatinstitutional investors are shying away from this area of the market for now.
Home building stocks have had a very nice bounce since July, but are coming up to longterm resistance at the 200 day moving average.
In other words, the housing market remains a high risk sector at this point.
Does that mean it should be avoided? Those with deep pockets and a multi-year time framemight consider starting to slowly build positions in the home builders, knowing full wellthat the road to profit could take a very long time, and be very full of pain.
OilAnd Commodity Summary:
Confusion Rules
The International Energy Agency put out a confusing set of conclusions last week, and theoil market sold off.
In one breath the IEA forecast an increase in demand for the fourth quarter. Yet, inanother part of its recent report the agency said that demand would grow slower thanexpected on a year over year basis.
More confusing is the fact that the IEA continued to point toward China as a source ofrising demand, while noting that demand for oil in China would slow.
The report also noted that OPEC's production has fallen below the recently set productioncuts, and that stores of current supplies will start to fall in North America.
The market responded to this ambiguity by focusing on the parts of the report thatsuggested that prices should fall, taking crude below $60, but not below the $57-$58support area.
Natural gas continues to hover near the $8 area.
The market remains difficult to trade. A stock by stock approach remains the best way toparticipate. See our energy section for individual stock picks.
Gold finally remained the $600 area, and may be picking up steam.
Natural gas rallied, but remained in the $7-$8 range, and gasoline futures rose above$1.50.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index will be important to watch over the next few days, as itmay have bottomed.
Chart Courtesy of StockCharts.com
Crude oil prices are testing the $58-$60 area. A rally above $62 would reverse the shortterm down trend.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) failed to remain above 200, a key development.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) has held above 1100, and looks to be building some strength.
Technical Summary:
Chart Courtesy of StockCharts.com
Momentum Recovers
Th ride may be bumpy, but the NYSE advance decline line and the numbe of stocks making new52 week highs remain in a favorable position, still suggesting that higher prices areahead.
The aftershocks of the election are still rumbling through the market. But as time passes,money managers are becoming more comfortable with the potential for a tense but ratherinactive relationship between Congress and the White House.
Of course that could change immediately, as the lame duck session begins.
Also important will be what the Federal Reserve does at its December 12th meeting. Theodds of a rate cut have fallen singificantly of late. But the odds of a rate increase havenot risen too dramatically.
The economy seems to be slowing in somesectors and rising in others. The Fed does not like wage pressures, though, and those seemto be on the rise.
One beneficiary of the current market may be the technology sector, as it is once againstarting to move higher, with the Nasdaq and the Nasdaq 100 making nice moves last week.
The Nasdaq 100 Trust (Nasdaq: QQQQ) is poised for a break. See our Tech Timing Models forour latest recommendation on the Q's.
What To Do Now
Be prepared for a sector rotation, with technology likely getting a boost. If there is aSanta Claus rally, it could be led by tech.
We have added several new recommendations to all our portfolios, with emphasis ontechnology, as well as energy, and biotech.
Weak stocks should still be sold, and strong stocks should be monitored for growing signsof weakness.
We have also added new positions to our Fallen Angels portfolio.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
Sentiment Summary:
Selling Raises Some Concerns
Option players got some concern back ahead of the weekend.
The CBOE Put/Call ratio checked in at 0.98 after the election. A consistent string of lowreadings can be a sign of excessive optimism and often signals a top in the markets.Readings below 0.5 are of concern, but not as serious as readings below 0.40. Readingsabove 1.0 are bullish. The numbers cited here are meant to be evaluated on a closingbasis.
The CBOE P/C ratio for indexes checked in at 1.64, after delivering a reading of 1.00 onWednesday fairly low number, which is reason to be cautious. Numbers above 2.0 as themarket sells off, often lead to rallies. Readings below 0.9 suggest too much bullishsentiment, just as readings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 10.79 and 15.52, continuing to drop steadily. A fall nearor below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usuallyconfirmed when the volatility indexes begin to rise. Readings above 40 and 50,respectively, are often signs that a bottom may be close to developing.
The Duarte Overbought-Oversold Gauge (DOOG) fell to 72.5. This remains an overboughtmarket, as the sell signal from 10-9 is still in play.
NYSE insiders were buyers of stock for the week of 10-27-06. NYSE insider short sales arestill at very low levels. When NYSE specialists raise their short sales, and sell stocks,risk increases dramatically. There is a two week lag for these figures.
Market Vane's Bullish Consensus checked in at 73% on on 11-10-06. This is the eigth weekabove 70%, which is a sell signal.
Market Moves
Realty Income Bucks Higher Interest Rates
Realty Income Corp. (NYSE: O) is near a break out, bucking higher interest rates.
Chart Courtesy of StockCharts.com
The real estate investment trusts have been steady performers in an otherwise jumpy marketof late. And Realty Income has been particularly steady.
The company has a unique business model. It buys retail properties, often from a companythat operates a store on the lot, and then leases the property back to the company.
The key is the length of the lease, whihc is usually long term. And the clients tend to besteady, non business cycle related companies, such as auto repair and convenience stores.
O trades at 11 times earnings and delivers a 9% return on investment, with a nearly 6%annual dividend yield.
The stock could move to the 30-31 area, if it can clear the current chart congestion at26.
Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) might have topped out, as traders worry about changes inhealth care.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) has been struggling lately after delivering a breakout a few weeks ago. This index may have seen its highs for the year.
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) continued to struggle.
Chart Courtesy of StockCharts.com
Small stocks are starting to show signs of regaining momentum.
