August 29, 2009
Bill Carrigan
Early last week we learned that the S&P/Case-Shiller 20-city, U.S. home price index and the 10-city home price index both rose 1.4% in June, more than double the rate of increase seen in May. One component, home prices in the Phoenix area, rose 1.1 per cent from the first quarter to second quarter of this year. That is considered to be good news because Phoenix home values are down 31.6 per cent from a year ago.
Cleveland had the greatest month-to-month home price rise in June, 4.2 per cent, followed by San Francisco (3.8 per cent), Minneapolis (3.1 per cent), Washington (2.8 per cent), Dallas (2.7 per cent) and Boston (2.6 per cent).
Now with the good news out perhaps we should jump into the iShares Dow Jones U.S. Home Construction ETF (NYSE-ITB). According to Barclays Global Fund Advisors, the fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. select home construction index. The index measures the performance of the home construction sector of the United States equity market, and includes companies that are constructors of residential homes,
Our chart this week shows the weekly closes of the ITB, spanning about 30 months. Note the price peak around $40 (U.S.) in the first quarter of 2007.
Keep in mind most of the components such as Pulte Homes Inc., D.R. Horton Inc., Lennar Corp. and Toll Brothers Inc. had broken under their long-term moving averages in late 2005 and early 2006 – long before the housing bubble became apparent.
Note the subsequent decline to the March 2009 lows at the $6 level followed by the stunning, 25-week, 117 per cent rebound to the $13 level. Clearly, we are too late to play the bottom fishing housing recovery game.
Late Wednesday, meanwhile, we learned that the number of new homes sold in the U.S. rose for a fourth consecutive month, posting an advance of 9.6 per cent month over month. The market consensus was for an advance of only 1.6 per cent.
Confused?
Perhaps the following quote from a book I read years ago will help.
"I didn't ask the tape why when I was 14, and I don't ask today, at 40. Your business with the tape is now – not tomorrow. The reason can wait."
(Reminiscences of a Stock Operator, Edwin Lefèvre.)
The message here is clear, stocks will rise and fall for reasons we discover only after the price movement. That is, bull and bear markets will be caused by circumstances that may not be known for weeks or months after the fact.
Birds of a feather fly together. When the components of the housing ETF are scanned for price movement we find the group is highly price correlated.
Another example is the Canadian financial sector, with most of the component banks posting quarterly earnings this week that surpassed expectations.
By the same token, another bottom fishing opportunity is lost because the iShares CDN S&P/TSX Financials Index Fund (XFN-T) has almost doubled in price from the March lows in anticipation of the banks' good news.
Once again ,when the components of the financial ETF are scanned for price movement, we find the group is highly price correlated.
These are examples of the powerful effect of bull and bear markets on equity returns. I believe investors would be better served by putting less emphasis on stock selection and chasing so-called compelling stories and more on adopting a sound investment strategy.
These can vary from using seasonal patterns, rotating through the various market sectors to simple quarterly rebalancing between fixed and equity exposure.
I prefer to use the long-term charts of stock sectors and the major stock indices to identify bull and bear cycles operating in these diverse asset classes. The strategy is to use any trend following tool and if upward adopt a buy-and-hold strategy.
If downward, take some profits and reduce your equity exposure.
Try this on Excel: Download the weekly closes of the S&P/TSX60 index from Yahoo Canada finance and identify the weekly high and low of the past 30 weeks. When the current close is above the highest 30-week high the trend is upward. When it is below the lowest 30-week low the trend is downward
The batting average has been good at 83 per cent from January 1994 to date, with the last signal a buy on May 29, 2009