Monday, June 05, 2006

Decidedly Down Dow

The Dow decided to get into gear on the DOWnside right from the get-go on Monday morning and ended the day off nearly 200 points.  We regret that we did not see one of the reasons for the opening weakness on Sunday evening.  Sometimes these things are difficult to find in the extremely bullish media.  Friday evening after the close—nice timing, don’t you think?—SPF (Standard Pacific) a home builder pre-announced that their orders were going to show a 40% year over year decline.  Now you know why we are so disappointed.  (You may not have seen that report either.)  

Anyway, the housing market continues to show that the real estate party has been over for almost a year now.  Looking at the stock of SPF, you can clearly see the peak in that company’s stock price, 49.70, last year on the Opening of trading on July 29th.  That coincides nicely with the peak of national home prices.  Yes, there are some pockets of strength in the country, like in Arizona, but for the most part the prices peaked last summer.  We have now begun to see the fallout from some of the drop in prices.  (Oh, in case you didn’t look at SPF’s chart, today’s close was 27.43, about a 40% drop in the price to match the drop in orders, poetic justice.)

Some could argue that there are other things going on but we have chosen to keep our eyes on the housing market to get a real sense of when the economy is going to tip over.  This is not a short term event; this housing peak is for many years to come.  The best we can say is that the real estate market is going to slowly, at first, move in the southerly direction.  Our theory is that the stock market will follow suit and today shows some evidence of that.

When we wrote our post last Thursday evening we were pretty convinced that Friday morning’s opening would be a good opportunity to sell.  By Friday afternoon, that didn’t really look to be the case but Monday, the bears have made a dent.  We see that overnight trading is firm so again there is No Fear in the traders.  Maybe the round number support is showing up this evening since the Dow is now near 11,000 again.

Whatever is going on now, we feel more convinced that we will see a drop in the prices over the coming weeks with intermittent bounces to take care of oversold conditions.  Feel free so sell any of those bounces, the decline is not over just yet.  In fact some scary things are going to happen as the market drops.  We have said that the position of the pattern of the market based on Elliott wave is very bearish and can lead to major gap down openings.  These should not be bought.  When we buy back into the market we will want to buy a gap down but we want it to be an exhaustion gap not a breakaway gap.

Be careful out there.

Dow Industrials:  11,048.72  -199.15
RYVNX:   21.49
RYAIX:  23.76
TLT:  84.68
BEGBX:  13.66

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