This Chart Says More Trouble Ahead for Stocks, Economy

— by Michael Lombardi, CFP, MBA

If you want to see a truly “pathetic” stock price chart, you have no further to look than the Dow Jones U.S. Home Construction Index. While there are rumblings that the housing bust is reaching a bottom, while one of the founders of the S&P/Case-Shiller housing index says that housing prices are not going to fall further, the chart tells a different story.

I often write about the housing market, because the direction of
housing prices is critical to the economy and the stock market. Aside from the millions of jobs in the U.S. dependent on the construction industry, housing prices play a critical role in the spending patterns of consumers.

It is logical for consumers to spend when they feel good about their financial situations. Conversely, they cut spending when they get financially concerned. Remember when house prices were rising yearly up to 2005? The mood of consumers was very positive. They felt good, which meant they spent more. In fact, they went out and borrowed more money to spend. And the more they spent, the more money companies made, and the higher the stock market went.

Today, with housing values having fallen since 2005, consumers, in a nut shell, are feeling very poor. Even if they have good equity in their homes, which the majority of Americans do, the physiological damage has been done. Consumers are not spending and they will not start spending until they feel that the economic situation has changed for the better.

Housing prices are very important to consumers, as homes are
usually the largest expenditure a consumer will ever make. If that house goes up in value, chances are the mood and spending pattern of the consumer will turn positive. The reverse is also true.

Going back to the Dow Jones U.S. Home Construction Index: the future for housing prices in the U.S., if you believe that stock charts tell the future six to 12 months out, does not look good at all. From mid-2005 to today, this index has fallen 82%. Despite several attempts in 2008 and 2009 to rally, the index continues to fall flat on its face. I watch the Dow Jones U.S. Home Construction Index closely for my readers. And, right now, the state of index does not bode well for the future; in fact, it sees more trouble ahead.

Michael’s Personal Notes:

Did you hear the one about the missing gold? Canada’s Royal Canadian Mint reports that it can’t find 15.3 million dollars in gold bullion, equivalent to 17,500 ounces. While the Mint says that it was not an accounting error, it hired Deloitte & Touche LLP to investigate. Now it’s called in the police. Could this be an “Ocean’s 11” type of heist? Who knows. All I can tell you is that, if the gold really was taken, and it’s not an internal problem, the thieves really knew what they were after — stealing something that will only increase in value over time.

Where the Market Stands:

We have two technical analysts that work with us, Bob Appel and Anthony Jasansky. While Anthony is currently updating his charts to get direction on the stock market, Bob feels that the stock market, after abandoning the rally it started in March, could easily fall another five percent before finding any support. The Dow Jones Industrial Average is down 7.2% from where it started in 2009. Big-cap stocks are expensive, with the Dow Jones trading at 45.7 times earnings according to The lack of follow-through by the stock market on its recent rally was very disappointing in terms of technical strength for stocks.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher — because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi, in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment. Gold trades at over $900.00 per ounce at present.