Uh oh. Usually that’s how these blog entries end, but this time, it’s an appropriate way to begin.
The S&P500 has now declined for six consecutive seeks, losing another 2.2% last week. The Dow is in its longest losing streak since 2002. The NASDAQ is now down for the year. Volume rose, which means that there was conviction behind the selling. While volatility (VIX) rose 5%, it’s still nowhere near panic levels. On the one hand, this means that investors are not heading for the exits; on the other hand, it means that should they begin to panic, the selling could get much more severe.
The economy continues to slow down. Initial jobless claims again rose more than expected and are now inching closer to the 450,000 range (solidly in recession territory). Consumer credit crept higher, but all of the increase came from government funded student loans; without federal funds, consumer credit would have continued to shrink.
Technically, the S&P is oversold in the short-term. While the risk of additional declines is still very high, it would be perfectly normal for equities to bounce up for a while—before resuming their decline. The reasons for further declines are more obvious on the weekly charts, where very important multi-year trendlines have been broken… to the downside. The next—and very critical—area of support is the 200 day moving average at 1,250 on the S&P. Should this not hold, then look out below!
Last week, Robert Shiller (professor of economics at Yale, and co-founder of the Case-Shiller Home Price Index) made headlines with his assessment of the US housing market, which is now five years removed from its peak in early 2006. Remember, Shiller was one of the few economists who correctly predicted that the US had a housing bubble…. well before it burst.
Recently, Shiller warned that housing prices in the US could fall ANOTHER 10% to 25% from their current levels. Note that as of today, US home prices have already fallen 33% from their bubble peak in early 2006.
He reminded us that in Japan, home prices have fallen over 66% since they collapsed almost 20 years ago. Home price in the US could follow a similar path.
The main reason? Case-Shiller’s long-term database of real home price data implied that prices 1.5 years ago were still 30% above their 100+ year trendline.
What’s happened since these calls? Well, it’s now (unlike the consensus back then) very clear that home prices have resumed falling. The latest—as of March—report from Case-Shiller has revealed that prices are have now fallen to new post-bubble lows.
The US housing market is double dipping, no question.
Well the same analysis that accurately predicted that housing had NOT bottomed almost two years ago is suggesting that prices need to fall by an ADDITIONAL 20+% to finally reach this magical 100+ year Case-Shiller trendline.
It’s nice to know that Robert Shiller agrees!