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Housing Bubble Bubble?



Look, I don't know anything. I'm just a technician. Technicians are almost by definition people who don't know anything about anything other than stock charts and indicators. In fact, as I outlined in my initial piece Off to the Races, one of the reasons I veered toward a technical approach as opposed to a fundamental approach is that I simply wasn't smart enough to understand how a company's fundamentals can be translated into an opinion on the direction of the company's stocks.

Now, having disclosed my intellectual limitations, let me also say that I'm not blind to common sense. It doesn't take a rocket scientist to figure out that American consumers cannot continue indefinitely to take down enormous amounts of debt, use their homes as ATMs by refinancing their mortgage every quarter and spend the bulk of that money on yet more goods and services while saving little if any of it. Eventually those debts must be repaid. The question is when, if ever, will any of this matter?

As a technician, one thing that concerns me from a sentiment standpoint (Jason, any thoughts?) is that there seems to be a high degree of unanimity of opinion that "yes, there's a housing bubble," and it will end tragically the way all bubbles do. Last night I even stumbled on a web site devoted to the housing bubble. Are bubbles really that easy to spot? (I also looked for a Treasury market bubble web site, among other bubble sites, but didn't have any luck finding one.)

I want to be perfectly clear here: I am not suggesting that a housing bubble or Treasury bubble is imaginary and nothing to be concerned about. On the contrary, our technical work tells us that we remain in a structural bear market, that market risk is extraordinarily high right now, and that the probabilities suggest that this ultimately ends in tears. However, high risk in the marketplace is not, in and of itself, a compelling reason to sell. High-risk market conditions can remain in place for weeks and months on end. This is why we never "anticipate our anticipators," to borrow an old Wall Street saw.

Consider the following examples:

• In 1997, the NYSE Bullish Percent hit 70% in June and did not reverse down until October. During that time the S&P 500 rallied another 10% after the initial move to 70%.

• In 1989 the NYSE Bullish Percent hit 70% in July and remained in Xs throughout August and September, not reversing down until October. After hitting that 70% market the S&P rallied another 11.7% to its top during those months.

• In 1975 the NYSE Bullish Percent hit 70% in February and stayed in Xs until July, nearly five full months, eventually hitting a high of 82%. From March 1975 to the July 1975 highs, the S&P 500 was up 17%.

Yes, logically I see the case for a bubble in housing, but I suspect that until more of us begin buying into the notion that the real estate market is somehow "different this time," and until the bullish case for housing begins to get more play than the bearish case, logic may continue to take a back seat.

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No positions in stocks mentioned.

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