The markets current three day rally has lifted the animal spirits of investors from every breed. The bulls are now claiming victory and the bears are still growling away. I like to look at pictures because as they say, “A picture paints a thousand words.”
For traders maybe this three day rally on the heels of a nine day decline within the prior 10 trading days is meaningful. But this picture shows that the uptrend from last year is broken. The 50 day moving average is now lower than the 200 day average. We have a series of lower highs and lower lows which is forming a trend, and not shown is the light volume that has accompanied the recent market run-up.
From a fundamental standpoint not much has changed either. Europe is still in a quandary. Housing (and credit), which started this whole mess is still in trouble. As a matter of fact, mortgage rates are at record-low levels and and even with that, new home sales and pending home sales plunged to new all-time lows in May. Also mortgage applications for purchases are still declining in June, and that demonstrates how beleaguered the real estate sector truly is.
For those who think the economy doesn’t need the real estate sector to improve for the overall economy to recover, are forgetting that for most Americans their home is their largest investment. Add to that fact the realization that consumer spending accounts for 70% of our economy. When people feel “house poor” they are less inclined to spend heavily. Therefore housing must recover for there to be a lasting economic recovery.
Until the current downtrend actually changes, it is premature to guess that the correction is over. This is most likely a reprieve before the next leg down.
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