Time to Connect the Dots?

Not much happened last week while we were away so we didn’t miss much in the way of analysis.  We expect continued sideways trading in the next few days as people are still out on vacation and coming back only after the Labor Day weekend coming up.  There are some kinks in that scenario because there is a big report out on Friday and that is the jobs’ report which we have been using as one of our guides to this market.  There are several other reports out this coming week that have the potential to move the market.  We will only focus on a few in the coming days, one of them being the July pending home sales which comes out on Friday after the jobs’ report.  So, Friday could have some interesting play going into the long holiday weekend.  

As for the stock market action we do think that the market is sitting atop a trap door that when opened will produce much selling pressure.  We’re not sure the catalyst to open that door nor do we want to speculate on it but we think the door will open fairly soon.  Our primary indicator tells us whether the market is overbought or oversold and right now as well as for the past week has been right near the overbought range.  Given the rally we had the week before that, an overbought range does make some sense.  

Looking at the prices to try to figure out anything that makes sense, we see that the Prices for the indexes are not being able to reach back to the May highs.  The rally efforts have been making for interesting media coverage and have given the bulls a chance to relax Again.  We call this feeling complacency and we measure it in the volatility indexes that you can watch, too.  While the Prices on the indexes can’t quite get back to the May highs, the volatility indexes are right back to where they were in early May when this decline started.

We repeat the April/May highs for the indexes, on a closing basis:

Dow Indu….11,642.65 on May 10th    Last Friday 11,284.05
NASDAQ COMP….2370.88 on April 19th    Last Friday 2140.29
SP 500….1325.76 on May 5th    Last Friday 1295.09

Do you wonder why people are so bullish, or should we say complacent, in the face of these types of price levels?  

Tonight, as we write this, we think that a market decline is very close.  Our thoughts are focused on the change of heart that the market had when the housing data was released last week.  As we reported in the our post, Wednesday evening, August 23rd, the market went down in the face of news that would bolster the Fed’s ability to stop raising rates.  To us this is a significant change in the way the news is being absorbed.  As the news unfolds over the next few weeks, we will be watching for that subtle change to manifest itself in a down market.  

We have been talking about the housing arena doing the stock market in for quite a while now.  We think the time has come for the market to really start connecting the dots on this thinking.  On Friday, H&R Block, yes, the tax people, said that they were taking a $102 million loan loss provision. You might like to know what that’s for, so we tell you, it’s for their involvement in the sub-prime mortgage business in the form of Option One Mortgage.  HRB’s stock was down just about 9% on Friday.

Of course, the way Barron’s connected the dots in this week’s edition was to proclaim on the Cover, under the title of Housing Ripple, that, “As home prices sink, stocks in the sector are falling to attractive levels.  It’s time to get constructive on names like Countrywide, Pulte and Whirlpool.”  


Dow Industrials:  11,284.05  -20.41
QQQQ:  38.32
RYVNX:   22.08  (own)
RYAIX:  24.34
RYCWX:  42.17  (own)
TLT:  87.44  (own)
BEGBX:  13.67