A Follow-Up On Housing
By Tim W Wood CPA, March 23, 2007
It seems that of late that a major topic being covered by the mainstream media is "sub-prime" mortgages and the related scare of the downstream impact. Well, the charts warned of problems in the home building sector a year and a half ago. In fact, it was in the October 28, 2005 Market Observation that I originally reported signs of trouble for the housing market. In the February 24, 2006 Market Observation I also reported on the technical problems and developments for the housing sector. Then, in the May 19, 2006 Market Observation I followed up again on the housing sector and reported that the evidence from the intermediate-term charts had continued to evolve to the point that the longer-term trend had topped. I went on to give very specific cyclical high and low points to watch for as continued confirmation of my thesis. My point here being, the charts were right and the mainstream media once again failed to warn and even refused to acknowledge a housing bubble. That is until now when the problem becomes obvious.
Now, once again, I want to follow up on the housing sector and take a look at what the charts are currently saying. The first chart below is a weekly chart of the Dow Jones Home Construction Index. I have marked each of the intermediate-term cycle lows since March 2003 with a blue "I" that is outlined in red. The 2004 intermediate-term cycle low came in May, the 2005 intermediate-term cycle low came in April and the 2006 low occurred in July. I have also included my intermediate-term Cycle Turn Indicator in blue and my Trend Indicator is in green and red. When the green is above the red, it is confirming an intermediate-term up trend, and when the red is above the green it is confirming an intermediate-term down trend. When the Cycle Turn Indicator is moving in the same direction as the Trend Indicator, it is telling us that we have trend uniformity. When the Cycle Turn Indicator is moving in the opposite direction of the Trend Indicator, it is telling us that we have a corrective move underway. That being said, let's now see what the charts are presently saying.
First, I want to point out that the intermediate-term cycle lows tend to occur in the spring to early summer timeframe, with the most recent intermediate-term cycle low occurring last July. From there this index moved up into the February 2007 cycle high. As you can see, both the Cycle Turn Indicator and the Trend Indicator have turned down. This is telling us that the decline from February is not a counter-trend move, but rather the decline out of the most recent intermediate-term cycle top. Now the question is, "Where will the coming intermediate-term cycle low occur?" Well, we know that there is a pattern in which the lows occur in the spring or early summer, so this is obviously one hint and we are approaching that timeframe now. This offers some reason of hope. But on the negative side of this equation we now have the Trend Indicator that has just turned down on the weekly/intermediate-term chart, which is telling us that this correction is only just beginning. If so, then we may still be a few months from the low. To simplify this matter all we really have to do is follow the Cycle Turn Indicator. When it turns up, we will then know that at least a short-term low has been reached and then we watch to see if that strength is sufficient enough to turn the Trend Indicator back up. If so, at that point we will know that the intermediate-term low has been made, but until such time, lower prices are expected.
The next important item to watch and understand is the price level in which the coming intermediate-term cycle low occurs. Note that the 2004 intermediate-term cycle low occurred at a level that was higher than the 2003 low and that the 2005 low occurred at a level above the 2004 cycle low. From a cyclical perspective, this meant that the longer-term trend was up. The problem then came when the decline out of the 2005 high moved below the April 2005 intermediate-term cycle low. I first talked about the importance of this in the October 28, 2005 Observation and then again in the February 24, 2006 Observation. Long story short, when the April 2005 cycle low was violated it told us that the longer-term cycle had turned down.
Now, let me point out that the February 2007 cycle high occurred at a lower level than the previous cycle high. Thus, we now have a lower cycle low and a lower cycle high. The lower cycle high adds another layer of confirmation that the longer-term cycle has turned down in that a lower high has now followed a lower low of the same degree cycle. I want to add here that both the long-term monthly Trend and Cycle Turn Indicators are also negative. These negative indicators serve to confirm what the cyclical or structural breakdown is telling us.
With this rather negative picture now painted I want to point out that as I read these charts, the price/indicator picture is clearly negative and lower prices are expected until the indicators turn back up. The key is the price level in which this low occurs. If the July 2006 intermediate-term cycle low is not violated with the current probe down as price searches for the coming cycle low, then at that point we will have our first indication that the longer-term trend has turned back up. I would of course want this confirmed by the longer-term indicators as well. However, should the ongoing decline into the coming intermediate-term cycle low violate the July 2006 low, then that violation will serve as structural evidence that the longer-term trend is still moving down. In the meantime, as we await this verdict and the possibility of a higher low, we know that the current price/indicator picture is negative and that lower prices are expected to follow into the coming cycle low.
Next, I have included a weekly chart of the Philadelphia Housing Index, and here the cyclical/structural and indicator picture is pretty much identical to that of the Dow Jones Home Construction Index.
Tim W. Wood
© 2007 Tim Wood