— “Calling the Trend” Column, by George Leong, B.Comm.
There is some life surfacing in stocks following the recent break of the DOW to below 10,000 and the S&P 500 to below 1,060. The fourth-quarter earnings have been largely to the upside and this has helped add support to stocks. The DOW has had three triple-digit daily gains over the past five sessions. During this stretch, market breadth has been bullish and investor sentiment has returned to bullish on both the NYSE and NASDAQ. While I sense the upside will be tested, I remain cautious. It is clear that the mood is improving, with 78% of U.S. stocks above their 200-day moving average (MA) as of February 16, up from 69% a week earlier, but shy of 85% a month ago. The CBOE Volatility Index (VIX) is holding at 22, well down from the previous week and an indication of some calm and reduced market fear.
The near-term technical signals have improved to moderately bullish with an associated strengthening in the Relative Strength (RS) to just above neutral. We need to see the RS strengthen further in order to lift the market. Be careful, as we expect selling pressure on continued upward moves.
Added to the decent earnings, we are also seeing continued encouraging news from the stagnant housing market. Housing Starts for January came in at the highest level in six months, with a year-over-year increase of 2.8% to 591,000 units, higher than the 580,000 units estimated, according to the Commerce Department. The news is positive and offers investors some encouragement; yet, at the same time, new building permits were in-line in spite of their declining 4.9% in January. Inventory levels of houses under construction declined 2.3% in January, which is positive and points to buying.
Before you get too excited, housing will continue to be a problematic area. We are still seeing declining home prices across the country, which is not good for consumer confidence and the urge to buy big-ticket items. The applications for U.S. home mortgages declined last week, according to the Mortgage Bankers Association. Yet the bottom line is that the current situation in housing is a vast improvement over that at the same time last year. What you want to see is steady improvement over time.
As long as the housing situation continues to show some improvement, however small, it is still something we can cheer about. The key will be how the housing market will fare once the credits for homebuyer programs established by President Obama end. With rates for mortgages remaining at historical lows, people need to become more confident about buying property without requiring a government incentive to do so. This will be critical for the housing market to continue to improve; otherwise, we could be in for a slow housing recovery.