The S&P500 pushed higher 2.2% last week, even though VIX (the fear index) jumped up 3.1%. This is a highly divergent outcome because normally the S&P500 falls when VIX rises. Volume was light, dominated primarily by highly traded and speculative issues such as Fannie Mae and Citigroup.
The economic data, although still weak, did not seem to matter much to the equity markets. On good news (the Philly Fed was better than expected), the market rallied. On bad news (pretty much all other data for the week), the market rallied as well. Housing starts and permits were lower than expected–in fact both fell when they were expected to rise. Producer prices (like CPI in the prior week) showed no signs of upstream inflation; on a year over year basis, prices are actually falling slightly. Jobless claims were worse than expected, as was the leading economic indicators index. Existing home sales will be addressed below.
Technically, the daily and now the weekly charts point to a severely overbought condition. The monthly charts are still in bear market territory when viewed over an 18 month horizon. This is true primarily because of the cliff diving that took place in the fall of 2008. So even the sharp rebound off the March 2009 lows has not decisively broken the multi-year downtrend.
On Friday, the mainstream media celebrated the existing home sales data. The good news centered around the 7% jump in units sold in July over the prior month. The pundits jumped on this rise as evidence that the housing market is bouncing back from its long-term crisis.
Why is the housing market important? Because it is ground zero for the Great Recession; it’s the largest part of the credit and asset bubble that burst in 2007 sparking a financial crisis and later, a massive recession, the one we’re still suffering from right now.
So if housing is recovering, the thinking is that this could pave the way for a true rebound in the economy itself.
The problem? This report was not properly interpreted and is really supporting NO end to the housing crisis.
Why? Well, the reasons are so numerous, here they are a few in list form:
1. Were it not for a mysterious 16,000 jump in condo sales in the northeast, the existing home sales figure would have fallen.
2. Sales of single family homes (ex-condos) did fall in July.
3. Sales were propped up (unsustainably) by the $8,000 housing credit set to expire in November.
4. Investors (speculators?) were behind an unusually large portion of the sales.
5. About 30% of the sales were distressed (foreclosed homes or short sales)
6. Foreclosure and mortgage delinquency levels jumped UP in the second quarter 2009 reaching record highs in this epic housing bust cycle.
7. Existing home inventories spiked up 7.3% (or more if unlisted REO is considered)
8. Hundreds of thousands (perhaps over a million) of homes are lurking in the shadow inventory category–banks and would-be sellers are waiting for the right time to dump these homes on the market over the next one or two years.
9. Prices are still down 15%-18% from a year earlier.
And there’s more, but the point is that anyone who proclaims that we’ve turned the corner in the housing market is either confused or intentionally trying to mislead the public.
The National Association of Realtors, for example, called the bottom in the housing market in 2007, 2008 and again in 2009. In a year–or two–perhaps they will finally get it right.