Chris Lau - Seeking Alpha

Friday, July 25, 2008

Is a Housing Recovery the Key to Stock Market Recovery?

This week, sales figures were released illustrating that the the U.S. housing market was continuing its slump: June 2008 home sales declined 2.6%, and median prices fell 6.1%. In addition, US unemployment rose to 3.1M. These two measures are the only numbers I am looking at. It justifies to me that any rally in the stock market will be short-lived, until each of the following occurs:

1) There is evidence that home sales and home prices bottom 

2) That the government rescue plan for Fannie Mae and Freddie Mac creates a sentiment that effectively loosens the loan/credit market

These two items are acting as a positive feedback loop to each other, and until there is a catalyst to break this downward trend, it is best not to build a long position in stocks.

Incidentally, there was an article in Business Week suggesting that every $1 loss in the credit market was worth $30 to the economy. That is why investors really need to pay close attention to the health of both banks and housing.

In short, the stock market always trades well ahead of the curve. Read up on both economic and fundamental figures. Monitor positive action in economic policy taken by the government. Monitor the VIX. This index alone will help traders identify the moment of over-selling and panic. 

More articles on the housing market, below:

[1] http://seekingalpha.com/article/86973-the-worst-u-s-housing-market-in-a-generation-could-mean-1-trillion-in-writedowns

[2] http://seekingalpha.com/article/86870-why-the-housing-bill-won-t-help-the-housing-market

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