A Small Reversal in Stocks

After yesterday’s DOWner, the market decided it was time to have a rally from those severely depressed prices (yes, there it is again, sarcasm, I’ll try to do better).  Out of the chute stocks appeared to be headed for the moon, rising steadily until around noon (do you like rhyming better than sarcasm?).  The bulk of the afternoon was spent treading water around the 10,910 level in the Dow, curiously below the highs of last week around 10,950.  That level seems to be impervious so far.  

A strange thing happened on the way to the close however, the market decided to fall the last hour of the day.  The last hour saw the Dow drop from that 10,910 level to close near 10,850, a significant reversal since it opened higher than that.  On the surface, people can see that the market was up on the day.  What they don’t know is that it closed near the lows of the day and below the open.  All of the major indexes exhibited this pattern of trading.  This is Not bullish.

Reading the online WSJ this evening, there is an article of note relating to the housing market.  It should be in the Wednesday paper version so you can look at it yourself under the title “Investors Retreat From Housing Market”.  The article suggests that investors, maybe we should call them real estate speculators, have slowed their purchases of homes for investment purposes.  It says that in Phoenix, about 30% of properties for sale are owned by investors while six months ago, most investors were buying rather than selling.  The article continues by saying that in April, there were about 8,600 homes for sale in the Phoenix area and in October that number climbed to 22,340.  

You have likely heard of the practice called flipping, which means that people buy homes and immediately put them on the market for sales at higher prices.  Some of these homes are pre-construction homes and have been popular with “investors”.  The article quotes a broker who had set up a web site last year specifically for “investors” that were looking for these pre-construction properties.  With the market softening, he reports that “I haven’t sold an investor a property to flip since June.”  

One of the headlines that we failed to report yesterday tells of another key data point on the housing market, that being the National Association of Realtors’ index of pending home sales dropping 3.2% in October.  As these pending sales drop, so do actual sales and this index is a leading indicator to tell us just that.  We may be reading too much into this one piece of data but we have seen more and more evidence of a slowing in the housing market over the past six months.  

To us, the real estate articles represent critical information that the stock market is currently ignoring, as this current rally has been maintained for almost two months now.  We continue to see deterioration in the housing market from all signs and we have to say that we are keenly interested in how the stock market will cope with the likes of a housing pullback.  So far, there has been enough smoke to confuse the market, but soon enough it will figure it out.  Until then we remain short.

The gold mining stocks managed to get to a new high for the year today which seems a little delayed based on where gold has been trading recently.  We feel this is a must avoid market at this level.  We would tell you to short it but we feel the stock market in general offers as good or better shorts.  Be careful and be selling any rallies.

Dow Industrials:  10,856.86  +21.85
RYVNX:  18.40
TLT:  90.01
BGEIX:  14.22  (new high)