Home Buyers Holding Out For Better Deals
Four years after leaving the Federal Reserve, Alan Greenspan is still making headlines – and still making statements that are difficult to interpret. Today he told the Council on Foreign Relations in New York that the government’s deficit spending is not helping the economy as much as he expected. He thinks taxes should go up to help close the deficit, but we would be “far better off” if normal market forces were allowed to operate. We’ll leave it to those more experienced at parsing his comments to sort through the apparently contradictory thoughts.
As always, of course, Greenspan left himself an escape clause. If housing prices drop further, “all bets are off,” he said, and housing prices seem set to do exactly that. Sales of new and existing homes plunged to record lows in the last two months, but median prices are still higher than they were in 2003. A huge “shadow inventory” of homes that must be sold but are not yet listed is overhanging the market in many places. Prospective buyers, to the extent there are any, seem content to hold out for lower prices. At the very least, housing seems set to remain stagnant for several years.
U.S. stocks are on a bit of a roll. Monday’s rally brought the S&P 500 above the 200-day moving average for the first time in over a month. It was the fourth time we have seen such a crossover since May, and none have managed to persist for more than a few days. Resistance around the 1130 level is proving tough to overcome. With the S&P 500 at the high end of a 3-4 month trading range, a big move one way or the other seems likely to unfold soon. Our best guess is it will be to the downside.
The gold chart looks a lot like the S&P 500 lately, with bullion prices also stuck near previous highs. There may have been a breakout earlier this week, depending which particular gold measure you look at, but so far we have not seen any follow-through. We will be interested to see if gold and stocks diverge from each other in the next few weeks – and in which direction.
With interest rates at historic lows, and bond prices at correspondingly historic highs, there has been a lot of talk lately about a developing “bond bubble.” The ten-year Treasury yield is holding stubbornly below 3%, and some traders are looking for it to drop below 2% by sometime next year. Households still have almost twice as much money in stocks even as bonds clobbered stocks over the last ten years. This suggests there is plenty of room for more capital to enter the bond market and drive yields lower still. The conditions for a bond bubble will be ripe eventually, but not just yet.
All the sector categories are now in positive territory, though not by much in a few cases. Materials and Telecom are still on top and trying to increase their margin over the others. Consumer Discretionary has moved into third place, thanks to recent strength in retailers. At the other end of the scale, Energy displaced Health Care as one of the bottom three sectors. Technology remains in last place amid lowered second-half guidance from chip makers.
All eleven Style categories stayed in the same relative positions from the prior week. All eleven also improved their momentum thanks to September’s broad market rally. Mid Caps still have the upper hand. Growth is ahead of Value for Mid and Small, but Value is better than Growth among Large Caps. Micro Cap is now the only category with a negative momentum reading.
Pacific ex-Japan is padding its lead over the rest of the field as it hits on all four cylinders – Australia, Hong Kong, Singapore and New Zealand are all performing well. Latin America slipped a bit to fourth place while still gaining in absolute strength. The world’s four largest economic zones (U.S., Japan, China, Europe) are still at the bottom of the ranks, though the U.S. replaced Europe in last place. Japan’s monetary authorities intervened in the currency markets overnight in an effort to halt the yen’s rise against the U.S. dollar. The action caused the yen to plunge nearly 3% and the Nikkei to surge +2.3%. We anticipate further volatility in the coming weeks.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
There are risks, but our choice is not between good and bad, it’s between terrible and worse.
Alan Greenspan, 9/15/2010
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