Stock market technical analysis is all you need to know, complete hogwash or somewhere in between.  It depends on who you ask.  If you find it interesting, you’ll probably like reading this weekly feature.

This is my standard intro to stock market technical analysis – you can skip down to the table (or click “continue reading”) if you read this feature regularly:

Many people who trade in the markets believe that there are patterns that can generally lead to profitable trades.  By analyzing stock charts that show the change in price along with the volume (how many shares were traded), “technical analysts” believe they have an edge and can time their trades profitably.  There is significant controversy over this subject, however.  Others say that, unless you have some information that no one else does, basically you can never beat “the market” because everything is already baked into the current price of a stock.

Nevertheless, supporters of stock market technical analysis are everywhere, and the tools for their trade can be found throughout bookstores and the Internet.  I like to follow some websites that do some of the work automatically and provide a snapshot opinion of whether a particular stock is considered “bullish” (going to go up in price), “bearish” (going to go down in price) or “neutral” (stay about the same price).

For simplicity, I’d like to start by showing you a snapshot of what several stock market technical analysis websites suggest about the exchange traded fund (ETF) with the ticker symbol of SPY.  This fund is supposed to go up and down the same as the S&P 500 index does.  And many people consider the S&P 500 index (a measure of the price of the 500 largest companies that trade in the U.S.) to be an accurate gauge of where “the market” stands.

For each of the sources below, where I have a choice, I will use a measure that attempts to predict the future direction of SPY or S&P 500 in the next 3 months.

S&P 500 Technical Analysis Summary

Source: Barchart.com   |   BEARISH   (downgrade)

Source: BarChart.com

Easy Notes: BarChart.com says that SPY is positioned to fall over the next three months.  This is the first non-bullish assessment after 23 consecutive weeks at a “bullish” level.  Two of the three signals are in the “sell” position, and the only that is considered a strong signal (at maximum strength actually and getting more so) is one of those two sell signals.  The one “buy” signal does happen to be the most predictive of the three signals, however.  But it is only average strength and moving toward a bearish direction.

According to this site’s stock market technical analysis, the current price of SPY is 36 percent of the way between “support” to “resistance.” (see below for definitions)  The total distance between the “floor” and “ceiling” is unusually far.  Thus, SPY has a lot of room to go up or down, and it looks like it’s a little easier for it to move up than down before meeting a barrier.

Additional Info

Support - It’s like a “floor” – a price where recent patterns have indicated that buyers will probably be more motivated than sellers, and so the price will likely not below that level.

Resistance - It’s like a “ceiling” – opposite of support – a price where sellers will likely be more motivated than buyers, and so the price will have a hard time rising above that level.

Source: CXOAdvisory.com   |   BULLISH

Source: CXOAdvisory.com

Easy Notes: CXO Advisory Group uses stock market technical analysis to project the earnings from the S&P 500 companies as well as the expected inflation rate.  Using these two estimates, it provides a projection out to about three months of the S&P 500 index.

The two most reliable models (REY-M and REY-L) for projecting 3-month movements project an average 13% gain from the current level by the end of July 2012, which translates to about a 82.80% annualized rate of growth.  That is a blistering pace, well above an average pace of growth.

Additional Info

I will estimate the forecast annualized growth rate from the projection.  If it is 6 percent or higher, I’ll categorize as “bullish” – below zero will be “bearish” – and anything in between will be “neutral.”

Why does this source sometimes go against what the other stock market technical analysis sites are saying?  It’s because this model assumes that stocks should be valued at a certain price based on their estimated future earnings and the rate of inflation.  Wherever the current price is relative to that projected price is the amount it expects prices to change.  So, if stocks take a tumble, it just means they have that much higher left to go to reach the targets that CXO believes they will attain.  In contrast, when stocks rally strongly, it lowers the amount left to rally for the rest of the three month period.

Source: StockTA.com   |   NEUTRAL

Source: StockTA.com

Easy Notes: StockTA.com provides its stock market technical analysis by analyzing numerous different technical indicators and combining them into a composite rating for either short (30 days), intermediate (60 days) or long term (120 days).  We are focusing on the long-term so it is as close to 3 months as possible.

The long-term rating stayed at “neutral” for the third consecutive week after several straight months of “bullish” assessments.  Here is a rundown of the specific indicators that are on one extreme or the other:

Very Bullish Indicators

• None

Very Bearish Indicators

• EMA – Exponential moving average analysis is a measure of the momentum of the price looking at the moving average but with more significance placed on recent prices.
• MACD – Moving average convergence divergence indicator shows the relationship between two different moving averages of the price.

According to this site’s stock market technical analysis, the current price of SPY is 76 percent of the way between “support” to “resistance.” (see below for definitions)  The distance between support (floor) and resistance (ceiling) is unusually far.  Therefore, SPY should have an easier time moving down than up before meeting a barrier, and it would have plenty of room to do so.

Additional Info

Support - It’s like a “floor” – a price where recent patterns have indicated that buyers will probably be more motivated than sellers, and so the price will likely not below that level.

Resistance - It’s like a “ceiling” – opposite of support – a price where sellers will likely be more motivated than buyers, and so the price will have a hard time rising above that level.

Source: Price vs 200-day Moving Average from Finviz.com   |   BULLISH

Source: Finviz.com

Easy Notes: SPY closed 2.08% above its 200-day moving average (versus 6.83% above for last week), which is generally considered a good sign.  Finviz has great stock market technical analysis tools, which I will expound upon a bit below.

The site currently indicates that the pattern for SPY contains several lines that represent barriers to movement:

• Horizontal – Near the 120 level, this horizontal line was created by drawing through important turning points that you can see from September thru January.
• Trendline support (the upward sloping blue line)
• Trendline resistance (the upward sloping purple line)

The way the two upward sloping lines are positioned, it looks like a strong upward wedge, a pattern that typically ends with a strong move downward once the price breaks below the lower line.  Unfortunately, SPY already broke well below the support line of this wedge and moved down a long way, as expected.  The question now is where will the plunge stop?  The only obvious place from the chart above would be the horizontal support line around 120, which means another 7.5 percent or so.  But other analyses on this page have support lines that are higher than that.

Additional Info

Moving Average – take the average of the closing price (last price of the day) of the last “X” number of trading days.  In this case, we used the last 200 trading days, which is a common time frame for analysis.

I will base the rating of this section purely on the 200-day moving average, not the other tools that I mention from the site.  Those will only be used for additional commentary.

Stock Market Technical Analysis Summaries – Additional Sources

Below, I will mention a few other sites’ stock market technical analysis of where things stand with SPY.  I don’t include these in my calculated average at the bottom of this page, however.  This is because these other sources don’t necessarily look at a 3-month time period for their forecasts.  But it’s nice to see what they are saying to get a sense for the consensus view.

Source: AmericanBulls.com   |   NEUTRAL   |   This site uses stock market technical analysis for the last few days of trading only, using the opening price, closing price and up/down movement of the day to make a prediction.  That information is translated into a series of “candlesticks” that technical analysts believe can show patterns that correlate with ups and downs.

Source: TradingMarkets.com   |   BULLISH   |   The “PowerRatings” system analyzes all kinds of quantitative data to forecast the price for the next 1-5 trading days, but it’s a proprietary method of stock market technical analysis (i.e., a “secret”).  It probably includes a lot of analyses that other sources on this page also use.

Source: StockSelector.com   |   NEUTRAL   |  The site hasn’t issued any new signals recently.

Source: StockConsultant.com   |   NEUTRAL   |   The analysis suggests several bullish indicators, but a strong bearish chart pattern counters those.

Easy Take

This big news this week is a downgrade in the BarChart.com analysis after 23 consecutive bullish assessments.  The CXOAdvisory analysis became ridiculously bullish (read that section’s “Additional Info” paragraph for why that happens), while the price of SPY moved down perilously close to its 200-day moving average, thus making that particular indicator close to losing its bullish status.  Even the StockTA.com analysis was a mere 0.01 points away from being “bearish” instead of “neutral” – so don’t feel too secure about where things stand right now.

The two analyses that quantitatively look at support and resistance agree that SPY has a lot of room to move, but they disagree on whether it is currently closer to support (floor) or resistance (ceiling).

Out of the four stock market technical analysis sources I’ve mentioned, we have 2 bullish, 1 neutral and 1 bearish.  If we were to average these using 3 points for “bullish”, 2 points for “neutral” and 1 point for “bearish,” we’d get an average of 2.25 out of 3 (versus 2.75 last week).  If we split the interval between 1 and 3 (which are the minimum and maximum we could get as an average) into three equal parts, that means the following:

1-1.666 = Bearish
1.667-2.333 = Neutral
2.334-3 = Bullish

Right now, the several indicators I’ve chosen to follow suggest a neutral outlook for the S&P 500 and, most likely, the market in general for the next 3 months.  This outlook was bullish last week.

NOTE: The outlook shown above is based on what the stock market technical analysis sources themselves are predicting.  I have been examining the relationship between components of the analyses I’ve mentioned to the S&P 500 index over the subsequent 4 weeks or 13 weeks.  Based on that, I publish an Easynomics stock market forecast for the S&P 500.

NOTE: You may be reading an outdated article.  Please visit my latest stock market technical analysis summary of the S&P 500 for more.

ECRI Index (also known as the ECRI Weekly Leading Index) is published weekly.  It is designed to predict the direction of economic growth in the next 6-9 months.  On this page, I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: I have decided to stop looking at the weekly index level for trends.  Instead, I will look at a 4-week moving average of the index level.  I am making this change because the weekly readings have too many ups and downs for which to detect meaningful trends, so this will smooth it out better.  The second component I analyze will continue to be the year-over-year change in that 4-week moving average.

The Economic Cycle Research Institute (ECRI) does something very similar to the Leading Economic Index from The Conference Board, but they are not at all transparent about how they do their calculations.  We can only wait to see what they publish as their index level and see where it leaves us.  But many people believe this is a good leading indicator for the economy.

Specifically, we will focus on two components of the indicator:

• Weekly Leading Index (WLI) 4-Week Moving Average – This is average of the four most recent values of the index released each week.  I prefer to look at this “smoothed” rate because the individual weekly readings have too many ups and downs for which to discover any meaningful trends.
• Weekly Leading Index Year-Over-Year Change in 4-Week Moving Average – Rather than using the ECRI’s complicated calculation for an annualized growth rate, which ECRI admits doesn’t do a great job of adjusting for seasonal patterns, it is easier to compare the level of the index to its level one year prior.  To smooth things out, we will do this using a four-week moving average.  So, it will be like asking, “What’s the difference between the average of the 1st four weeks of the index in 2012 versus the 1st four weeks of 2011?”

Here is a graph of the ECRI Index (WLI) for the past year from ECRI:

Source: BusinessCycle.com

ECRI Index Trends and Projections

Below, I will discuss whether the ECRI Index is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.

ECRI Index Trend Analysis

Here is a chart of the recent trends in both the index level and the year-over-year change of the 4-week moving average:

Source Data: BusinessCycle.com

Source Data: BusinessCycle.com

Easy Take

Last week, the year-over-year comparison of the 4-week moving average of this forward-looking index showed a potential downtrend forming.  Fortunately, the latest report reversed that, and in fact we are now looking at a potential rising trend forming when looking at year-over-year comparisons.  Unfortunately, the 4-week moving average on its own is in a confirmed falling trend.  But because seasonal factors (patterns that we see around the same time each year) could be affecting this, if the two different ways of looking at the index disagree, I tend to favor the analysis of the year-over-year comparisons.  Still, the overall picture is quite mixed.

It’s fascinating that, despite what the trends look like in the level of this leading index, ECRI itself published an article reaffirming its prediction that we are headed for a recession in the coming months.  There is some controversy though, as their prediction flies in the face of numerous other indexes and recession prediction models.  Still, the recent hints of a slowing economy would support ECRI’s notion.

The other thing to follow is the differing views of the ECRI Index and that of The Conference Board’s Leading Economic Indicators (LEI).  After six consecutive months of positive changes in the LEI, the latest report (April) finally came in worse than the previous month’s.  Still, it wasn’t much of a drop, and a longer view of the LEI suggests continued economic growth, a contrast from what the ECRI is publicly stating.  Which of these two leading indicators will be correct?

NOTE: You may be reading an outdated analysis.  Please visit my latest ECRI Index trend analysis.

In this article, I’ll take do an “Easy Trends” analysis of the initial weekly unemployment claims data.  ”Easy Trends” is a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

First, a nice summary about Initial Weekly Unemployment Claims and why they matter, from Econoday: (note: “jobless claims” are the same as unemployment claims)

Jobless claims are an easy way to gauge the strength of the job market.  The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy.  Nearly every job comes with an income that gives a household spending power.  Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

Here’s a chart of the four-week moving average for weekly jobless claims from Calculated Risk:

Courtesy: CalculatedRiskBlog.com

Unemployment Claims Trends and Projections

Below, I will discuss whether unemployment claims data is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.

Unemployment Claims Trend Analysis

Source Data: U.S. Department of Labor

Current Trend: (Week ending) Apr 28 – May 12, 2012.  During that time, there was a confirmed downtrend, showing initial weekly unemployment claims were falling by about 4,625 per week.

Last Confirmed Trend: (Week ending) Mar 31 – Apr 14, 2012.  During that time, unemployment claims were rising by about 6,250 per week.

Projected Next Data Point

The next report is for the week ending May 19, 2012.  If the most recent trend (excluding off trend points) is still intact, the actual week ending May 19 reading would need to be about 374,000 so that the 4-wk moving average would be at the expected level of about 370,400.  It’s a good bet that we will see a number at or below that, so the downward trend will most likely continue next week – good news for the economy.

Easy Take

The latest single week’s reading of jobless claims was again reassuring – 370,000 this time.  It was strong enough to reduce the four-week moving average once again.  In my unemployment claims post last week, I correctly predicted that the rising trend would end with this week’s results.

Given recent weakness in many other indicators (see my latest economic indicators roundup for more), it is reassuring to see the weekly unemployment claims take a turn for the better.  Of all the jobs-related indicators, it is the closest to being a leading indicator of any kind.  Typically, we see changes in the labor market lagging the changes that we see in the general economy, but initial weekly unemployment claims are about synchronous with the general economy.  Some argue they are slightly leading. You can be worried that things might slow down in the coming weeks or months, but as long as the 4-week moving average of the unemployment claims stays down below 400,000 we probably aren’t in danger of a recession just yet.

Another thing to note is that the four-week average isn’t much different from where it was a month ago.  That’s important because the level in the middle of the month coincides with the time they do surveys for the monthly jobs report (Employment Situation).  This means that we may be due for another nonfarm payrolls number that is disappointing for the most part.

NOTE: You may be reading an outdated analysis.  Please visit my latest unemployment claims trend analysis for more info.

Housing and Real Estate – Easy Pod (May 17, 2012)

Housing and real estate were at the center of the most recent financial crisis, so it should be obvious why it is an important part of our economy …

For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end.  You can review any charts/graphs afterward.  I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …

I’m continuing with a feature called “Easy Pod” – a collection of indicators that help portray the current status of something.  In this post, that something is housing and real estate. Let’s first review a few key concepts that are important to know about housing and real estate: (you can skip to below the first horizontal line if you’ve read this Easy Pod in the past)

• There are two basic kinds of real estate, residential and non-residential.  Residential refers to places where people live.  Non-residential includes things like businesses, office buildings or warehouses.
• For residential real estate (this is what we’ll refer to as “housing”) there are new homes and existing homes.  The difference should be fairly obvious.  New homes are looking for their first owner, while existing homes already have an owner.
• “Inventory” is how many of something you have available to sell.  When we talk about the current inventory of new homes, we are talking about how many new homes are available to be sold.  When inventory is high, that makes it more likely that prices will be lower.  Remember, it’s the “supply and demand” basics here.  If you have too much of something, people will pay less for it.  The way we try to measure inventory in housing is by comparing how many unsold homes there are versus how fast homes are selling.  That’s why you’ll see things like “8 months inventory.”  It means that, at the current rate of home sales, it would take 8 months to get rid of the extra inventory.
• Sales levels and prices are definitely related to one another.  If you see home sales slowing down, it means that homes are not in as much demand, so chances are good that prices will go down.  You have to look at the combination of housing prices, sales and inventory to get a good feel for what’s going on.

There are a number of indicators that describe what’s going on in housing and real estate, and there are even some people who combine these indicators into one number (an index) to give a summary.  In this “Easy Pod” I will show you indicators and indices that I like to follow.  Check back regularly for updates.

Special note:  You’ll notice a bunch of my charts shown below come from Calculated Risk.  This is a must-see for information on the economy.  I visit this site multiple times every day.  Bill McBride does a fantastic job of analyzing the most important economic data and events, putting them in context.

Quick Summary

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Indicator: New Home Sales   |   NEGATIVE
Easy Intro: None yet   |   Link to Source: Click here   |   Latest Date This Info Represents: March 2012

Quick ‘n Easy Every new home that is built and sold adds to the Gross Domestic Product (GDP), helping our economy grow.  Unfortunately, in April 2012, new homes were selling at an extremely low rate.  Fortunately, not too many new homes are being built so that the ones in inventory (still on the market) can get cleared out at a normal pace.

Courtesy: CalculatedRiskBlog.com

Easy Description: Statistics that tell us how many new single-family homes (basically a building for one family, not apartments or condos) were sold.  It also tells us about the selling price of those homes and the unsold inventory of new homes (waiting to be sold).

Latest Reading: If sales in March 2012 were to continue at that rate for a whole year, there would be 328,000 new homes sold.  This “annualized” rate is 7.1 percent lower than last month’s rate, and it is 7.5 percent above the rate from the same month last year.  The median sales price (half of homes sold for less than this amount, the other half sold for more) was $234,500.  That is 6.3 percent higher than the median price one year ago.  There were 144,000 new homes still for sale (inventory), so at the current pace it would take about 5.3 months to sell the remainder.

Also, take a look at my latest new residential homes inventory months of supply trend analysis to see where the trends are headed.

Implications: The pace of new home sales has largely been moving sideways for some time but is giving us some hope since rising a bit in the 4th quarter of 2011.  The “5.3 months of inventory” part is key to understanding that home builders have done a pretty good job of adjusting to market conditions.  Because so few homes are being sold, they have been dropping the number of homes they build way down, which means that supply is decreasing and price isn’t decreasing as much.  (Quick refresher on “supply and demand” – when something has a bigger supply  than there is a demand for it, sellers are forced to lower the price so that buyers will have a greater willingness to buy it.)  We are at incredibly low levels of new home construction, which is why that inventory months of supply figure is not way above historical averages anymore.  Before the housing boom, the typical months of inventory level was around 6 months.  At the 6 months level, prices tend to be stable.

So, what happens if new homes start selling again?  Builders will start making more homes, which will push up supply just enough to keep up with the new demand so that prices don’t move too much in one direction or the other.  The kind of massive price increases we saw in the housing boom were unsustainable, just as massive price decreases from this point would have to be temporary, too.  Market forces will always push things toward a “healthy” equilibrium.

But regardless of the fact that the inventory number is looking pretty decent, this number of sales (328,000 annualized rate) is just awful.  And when fewer homes are being sold, that’s less economic growth.  The sale of a new home is just like the sale of a car, television or clothes – someone made something and sold it, which adds to the GDP.  What we’d like to see from here is a continued increase in new home sales numbers while keeping that months of inventory right around the 6 month mark.  That would mean the housing market is on its way to greater positive contributions to the GDP report without having any false imbalances in the system.

Easynomics Rating Methodology: The long term average is about 672,000 new homes sold per year.  I’d like to see numbers that are within 15 percent of that average.  Therefore, I will give this indicator a rating based on the average of the last three months’ annual selling pace: Above 772,000 is “positive”; below 571,000 is “negative”; anything between is “neutral.”

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Indicator: Housing Starts   |   NEGATIVE
Easy Intro: None yet   |   Link to Source: Click here   |   Latest Date This Info Represents: April 2012

Quick ‘n Easy The sale of a new home begins with the start of a new home.  We want to see high numbers of homes built at the same time as we see high volume of new home sales.  In April 2012, we were at very low levels of housing starts because the sales volume was very low.  Permits were a little higher than the previous month, which is good news because now that the inventory level of new homes is in good shape, it’s ok to see signs of more new homes being built in the near future.

Courtesy: CalculatedRiskBlog.com

Easy Description: This report provides two key pieces of data.  First, it tells us how many privately-owned housing units have been started.  Second, it reports how many building permits were issued for privately-owned houses.  Changes in the building permits number should, in theory, predict what will happen in housing starts because you get the permit first and then start building.  This is not believed to be true by everyone though.

Latest Reading: If housing starts were to continue at the pace we saw in April 2012, after one year there would be 717,000 new homes started.  This “annualized” rate is 2.6 percent higher than the previous month and a whopping 29.9 percent above the rate for the same month last year.  The annualized rate for building permits was 715,000.  This is 7.0 percent below last month and 23.7 percent above the rate for the same month last year.

Implications: These rates are extremely low, as you can see in the chart on the right.  On one hand, we want the number of housing starts to be high because building a house creates jobs.  On the other hand, if too many houses are built compared to the demand for those houses, their selling price will drop and all homeowners will see the values of their homes go down, causing people’s net worth to decrease.  What we’d like to see is a higher rate of housing starts in response to or in conjunction with an increase in the rate of sales of new homes (see the new home sales numbers elsewhere on this page).  It looks like new home construction is generally rising, while new home sales have only recently begun rising slightly.  If this trend continues, we might expect to see the months of supply of new homes start inching back upward again (bad).  On the other hand, if the home builders know something the rest of us don’t, and they are correctly anticipating greater demand for new homes several months from now, then things will be just fine.

Easynomics Rating Methodology: Over the last 10 years, there have been an average of 1,354,000 housing starts per year.  I’d like to see numbers that are within 15 percent of that average.  Therefore, I will give this indicator a rating based on the average of the last three months: Above 1,557,000 is “positive”; below 1,151,000 is “negative”; anything between is “neutral.”

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Indicator: NMHC Quarterly Survey of Apartment Market Conditions   |   NEUTRAL   (downgrade)
Easy Intro: None yet  |   Link to Source: Click here   |   Latest Date This Info Represents: April 2012

Quick ‘n Easy A survey shows that there lots of people looking to rent apartments compared to the number of empty apartments available.  This is a classic “supply and demand” situation that is now tipped toward more demand – so, it means the price of renting may stay high or rise even higher.  This may encourage people to buy homes rather than to rent.

Courtesy: CalculatedRiskBlog.com

Easy Description: This index is based on a survey of top-level executives in apartment-related firms.  They basically ask them how things are going in their markets in terms of finding people to rent apartments.  If there are more people looking to rent than there are vacant apartments available, conditions are called “tight.”  Readings above 50 indicate that, on balance, apartment markets around the country are getting tighter.  Tight market conditions will eventually lead to better housing indicators because when apartment conditions are tight, that drives up the price of apartments.  And the higher that price is, the more likely someone is to try purchasing instead of renting.

Latest Reading: After a couple of uncomfortably low readings of 60 or lower, the index was back up to 74 for April 2012.  Because this represents a move away from an equilibrium point, my rating is downgraded to neutral.

Implications: The last two times this index has dropped below 50, it was just before or just after the beginning of a recession.  Fortunately, the index headed back up after a close call.  The tight apartment market should keep rents high, which may encourage people to buy homes rather than rent.

Easynomics Rating Methodology: In the housing market, if things get too far “out of whack” with respect to nearly anything, it doesn’t matter which direction … it’s a negative.  We don’t want a bubble or an overly pessimistic crash.  Therefore, I will give this indicator a rating as follows: 35-65 is “positive”; 66-80 or 20-34 is “neutral”; above 80 or below 20 is “negative.”

 

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Indicator: NAHB Housing Market Index (HMI)   |   NEGATIVE
Easy Intro: None yet  |   Link to Source: Click Here   |   Latest Date This Info Represents: May 2012

Quick ‘n Easy A survey of people in the home building industry shows that conditions in the market for new homes and the amount of interest in buying these homes is still very low, but it has generally improved since late 2011 and is at its highest level in four years.

Courtesy: CalculatedRiskBlog.com

Easy Description: This is based on a survey of members of the National Association of Home Builders (a trade association).  It asks them to rate market conditions for the sale of new homes right now and in 6 months, and it also asks them to rate the amount of traffic of people interested in buying the new homes.  It combines the answers to these three questions into one number between 0 and 100.

Latest Reading: 29 for May 2012.  This is five points better than last month’s revised figure.  It is now at the highest level since May 2007.

Implications: Despite a clearly significant rise in this index since late 2011, the actual level is still very low.  Home builders are basically telling us that it is still very difficult to sell new homes, but conditions are definitely improving.  Notice that changes in the HMI look like they predict the changes in the number of single-family homes that are started.  Thus, we can expect that there will be a rise in the number of new single-family homes built in the coming months.

Easynomics Rating Methodology: I will give this indicator a rating as follows: 67 or higher is “positive”; 34-66 is “neutral”; 33 or below is “negative.”

 

 

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Economic Indicator: Easynomics Real Estate Price Stability Index (EREPSI)   |   POSITIVE
Easy Intro to Easynomics Real Estate Price Stability Index   |   Latest Date This Info Represents: March 2012 (contains estimated portion)

Quick ‘n Easy An index designed to look at the stability of home prices indicates that, thru March 2012, there is room for another 1.57 percent drop in home prices before reaching a stable point.  If trends in months of supply and price/rent ratio continue, it is likely that prices will hover extremely close to the stable point in April and beyond.  We will probably see inventory of homes for sale flatten out, leaving the EREPSI right around the zero mark.

Easy Description: This index is an average of three indicators that help ascertain whether home prices are above or below historically normal levels: 1) new homes inventory months of supply, 2) existing homes inventory months of supply and 3) price-to-rent ratio.  For more info on what these mean, click on the “Easy Intro” above.

Latest Reading: Thru March 2012, the EREPSI is at minus (-) 1.57 percent, which means there is room for another 1.57 percent drop in home prices before reaching a stable point.  The March reading is based on actual values for the “months of supply” components but uses an estimate for the Case-Shiller HPI.  For recent trends, you can read my latest analysis on new residential homes inventory months of supply or existing homes sales and inventory months of supply.

Implications: After a strong move up starting in July 2011, the index has essentially plateaued since December 2011.  If trends continue, it looks like March may have seen conditions reach an equilibrium point.  My somewhat arbitrary decision is to call this index “positive” if it’s within 7.5 percent of a the stable point, which of course it is right now.  Prospects for some stability in home prices look, dare I say, extremely good.  Based on the parameters that this index tracks, there is hope that real estate prices may not move down much farther from here.  There is a lot of talk out there from analysts that we’ve already reached the bottom for home prices.  This index would agree with those assessments.

Easynomics Rating Methodology: In the housing market, if things get too far “out of whack” with respect to price-to-rent ratio and inventory, it doesn’t matter which direction … it’s a negative.  We don’t want a bubble or an overly pessimistic crash.  Therefore, I will give this indicator a rating as follows, based on the most recent month with actual “months of supply” data to use in calculations: Within 7.5 percent of zero in either direction is “positive”; within 15 percent of zero in either direction (but not closer than 7.5 percent) is “neutral”; farther than 15 percent from zero in either direction is “negative.”

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Easy Take

We have 1 positive, 1 neutral and 3 negative indicators this time.  Using a scale of positive=3, neutral=2 and negative=1, this yields an average rating of 1.6 out of 3 (versus 1.8 out of 3 last time), which falls in the bottom third of the possible range.  In other words, my set of indicators for the housing and real estate market currently combine into a “negative” rating.

We are continuing to see signs of stabilization in the real estate market.  The reason the overall consensus dropped was that apartment conditions are getting too tight and throwing off the equilibrium a bit.  While this is a temporary bad thing, it may not last long given the affordability of homes right now.  Yes, there appears to be a slight uptrend in the housing starts and building permits, but if the anticipated demand for homes doesn’t increase alongside that, we will have too many new homes on the market, which will push prices down.  Demand for homes will only rise with improving economic conditions that lead to jobs and income.  The problem is that depressed home prices often keep people from being able to move to take a new job.  Little improvements here and there could get the ball rolling, assuming we don’t have a significant recession in the next 12 months.  We are beginning to see the light at the end of the tunnel.

NOTE: You may be reading an outdated analysis.  Please see my latest Housing and Real Estate Easy Pod for more info.

Therefore, per the rules I laid out, here is what happened:

- On the close of Tue May 15, the price of EFA was so far below the 10-month closing average (assuming it was the last day of the month) that it would almost certainly not be a “buy” by the end of the month.  There were only 11 trading days left in the month at that point, and during no 11-day period out of the last 30 such periods had the price of EFA risen more than the deficit that EFA had earned at the close of May 15.

- My rules dictate that I begin exiting the EFA position, in this case meaning to “sell” because it was a long position.

- Ideally, I would reduce the position by 1/11th each day until the end of the month.  But to minimize commissions, I buy 5 days’ worth at a time.  So, 5/11ths of the position is about 79 shares.  Thus, I did a “sell” of 79 shares of EFA at 5 minutes after markets opened on May 16.  I will do another round of what is left five trading days from now if the conditions are still warranting the early exit.

All of this is accurately reflected in my current portfolio now.

Therefore, per the rules I laid out, here is what happened:

- On the close of Mon May 14, the price of EEM was so far below the 10-month closing average (assuming it was the last day of the month) that it would almost certainly not be a “buy” by the end of the month.  There were only 12 trading days left in the month at that point, and during no 12-day period out of the last 30 such periods had the price of EEM risen more than the deficit that EEM had earned at the close of May 14.

- My rules dictate that I begin exiting the EEM position, in this case meaning to “sell” because it was a long position.

- Ideally, I would reduce the position by 1/12th each day until the end of the month.  But to minimize commissions, I buy 5 days’ worth at a time.  So, 5/12ths of the position is about 95 shares.  Thus, I did a “sell” of 95 shares of EEM at 5 minutes after markets opened on May 15.  I will do another round of what is left five trading days from now if the conditions are still warranting the early exit.

All of this is accurately reflected in my current portfolio now.

Let’s talk about industrial production, its importance and the current trends.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

First, a nice summary of what Industrial Production (IP) is from Econoday:

The index of industrial production shows how much factories, mines and utilities are producing.  The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation.  Consequently, this report has a big influence on market behavior.  In any given month, one can see whether capital goods or consumer goods are growing more rapidly.  Are manufacturers still producing construction supplies and other materials?  This detailed report shows which sectors of the economy are growing and which are not.

Easy Translation: The first sentence is probably enough for an understanding – what’s being produced at factories, mines and utilities.  The second sentence is a key detail though.  Because it relates to manufacturing, and manufacturing is only about 20 percent of our economy, at first glance one might consider this indicator not important.  But the changes in the manufacturing sector track the changes in the economy extremely well.  In other words, the cycles of the two are well matched, making IP incredibly important to track.

Here’s a chart of the Industrial Production Index from Calculated Risk (a level of “100″ represents the level in 2007):

Courtesy: CalculatedRiskBlog.com

Industrial Production Trends and Projections

Below, I will discuss whether industrial production is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.

Industrial Production Trend Analysis

Source Data: Federal Reserve

Current Trend: April 2011 – April 2012 – Confirmed upward trend of about 0.399 in the index per month, which is about 0.41 percent.  Confidence level for this trend is at virtually 100 percent.  We haven’t had a single trend (established or otherwise) in the negative direction since early 2009.  Last month, it looked like we were veering off trend (too low), but we’ve moved back in line with a barely less steep rise now.

Last Confirmed Trend: Aug 2009 – Mar 2011.  During that time, the Industrial Production Index was rising by about 0.432 per month.

Projected Next Data Point

The next report is for May 2012.  If the recent trend (excluding any off trend points) is still intact, the next reading of the Industrial Production Index would be about 97.74 for May 2012, an increase of 0.33 percent from the previous month.  This seems like a very attainable level.

Easy Take

After some generally downward revisions to the previous several months, the report for the April 2012 Industrial Production Index showed a healthy bounce upward.  While it put us back in line with a trend that began in April 2011, it did result in a barely less steep rise than we had before.  Still, I’d happily take a confirmed rising trend over none at all.  Industrial production is a leading indicator for the economy, so as long as we’re seeing a rising trend, we can expect that the economy will be growing for several months down the line.

NOTE: You may be reading an outdated analysis.  Please visit my latest industrial production trend analysis for more info.

For an explanation on “Easynomics Court” and how it works, read this page on leading indicators vs six months into the future.

Leading Indicators vs February 2012

Original charge made in August 2011: “The Leading Indicators hereby charge that February 2012 shall be a NEUTRAL month, as indicated by a positive growth rate but below historical averages.”

NOTE: I don’t have all the historical data perfectly the way I’d like to see it from August 2011 (the date the “charges” would have been made) so I am only reasonably certain that the leading indicators would have charged it this way.

Exhibit A – ECRI U.S. Coincident Index Growth Rate | NEUTRAL

The U.S. Coincident Index for February 2012 grew at an annualized rate of 3.41 percent from the index six months prior.  This is positive and barely above a historically average level of 3.3 percent.  This is consistent with an economy that is not in recession but not growing at an unusually fast pace either.

Easy Description: The Economic Cycle Research Institute (ECRI) does something very similar to the Coincident Economic Index from The Conference Board, but they are not at all transparent about how they do their calculations.  We can only wait to see what they publish as their index level and see where it leaves us.

Easynomics Rating Methodology: I like to examine the indicator’s growth rate over the past six months but expressed as an annualized rate.  When that is between 3.0 and 3.6 percent, I will issue a “neutral” rating – above or below that range will be “positive” or “negative” respectively.

Exhibit B – The Conference Board Coincident Economic Indicator | POSITIVE

During the six months leading up to February 2012, the Conference Board’s Coincident Economic Indicator rose at a 3.63 percent annualized rate.  This is consistent with an economy that is growing at a rate that is above the historically average 3.3 percent rate.

Easy Description: Basically, this index from The Conference Board is a combination of several indicators that traditionally correlate well to the current state of the economy.  For simplicity, we won’t talk about all the indicators that it combines.

Easynomics Rating Methodology: I like to examine the indicator’s growth rate over the past six months but expressed as an annualized rate.  When that is between 3.0 and 3.6 percent, I will issue a “neutral” rating – above or below that range will be “positive” or “negative” respectively.

Exhibit C – e-Forecasting.com Monthly GDP Estimate | POSITIVE

The monthly GDP estimate from e-Forecasting.com reflects that in February 2012, there was an annualized growth rate of 3.8 percent over the three-month lead up time.  This was above historically average growth rates.

Easynomics Rating Methodology: I like to examine the indicator’s growth rate over the past three months but expressed as an annualized rate.  When that is between 3.0 and 3.6 percent, I will issue a “neutral” rating – above or below that range will be “positive” or “negative” respectively.

Exhibit D – Chicago Fed National Activity Index 3-Month Moving Average | POSITIVE

The moving average of the last three months (CFNAI-MA3) for February 2012 was plus (+) 0.37.  This is consistent with an economy that is growing faster than historical averages.

Easy Description: The Federal Reserve Bank of Chicago combines 85 different indicators into one number to give a sense of whether the overall U.S. economy is growing (numbers above zero) or shrinking (numbers below zero).  If you average the last three months’ index values, you get the CFNAI-MA3 (“moving average 3 months”).

Easynomics Rating Methodology: I will give this indicator a rating based on the CFNAI-MA3 as follows: +0.20 or higher is “positive”; between +0.20 and -0.70 is “neutral”; -0.70 or worse is “negative.”

Exhibit E – ADS Business Conditions Index | NEUTRAL

The average daily value of the ADS Business Conditions index for February 2012 was minus (-) 0.103.  This is consistent with an economy that is growing but probably at a below-historical-average rate.

Easy Description: Combines several indicators together to describe current business conditions.  A value above zero means that conditions are better than average, but below zero means worse than average.

Easynomics Rating Methodology: I like to examine the indicator’s average daily value for the month in question.  When that is between -0.25 and +0.25, I will issue a “neutral” rating – above or below that range will be “positive” or “negative” respectively.

Verdict

NOT GUILTY – Easynomics has determined that February 2012 was a POSITIVE month (based on averaging the ratings above).  The month is not guilty of charges that it would be a NEUTRAL month six months earlier by leading indicators.

NOTE: You may be reading an outdated analysis.  Please see my latest Easynomics Court Verdict article for more info.

Today, we saw the Industrial Production (manufacturing, mines, utilities) numbers for Europe, and they actually dropped from last month unexpectedly.  This is essentially the last piece of data we see before GDP (broadest accepted measure of economic activity) numbers will start being released for various European countries and the “Eurozone” as a whole tomorrow.  Most people expect that the estimated GDP growth for the 1st quarter of 2012 will be negative, which would mean two straight quarters of negative growth, which technically would be considered a recession.  The coincident indicator (measure of how things are going in the economy right now) from The Conference Board shows that the Eurozone probably hit its temporary maximum economic conditions back in mid-2011, which means that Europe has probably been in recession for 6-9 months already.  Given that the leading index from The Conference Board hasn’t really turned up, they are probably going to stay in recession for some time.  Fortunately, it hasn’t been an extremely severe recession thus far.

Spain and Italy Viewed As Even More Risky Than Before

The interest rate (yield) that Spain’s government must pay on 10-year bonds has risen again.  Remember, this is money that Spain borrows from other people, institutions, etc.  The fact that they must pay a higher rate of interest implies that they are viewed as a greater risk of defaulting (not paying back) on the loan.  In fact, if you compare the yield on Spanish 10-year bonds to that of Germany (considered essentially a risk-free country), that difference is at the highest its ever been since the Eurozone came into being.  That “spread” is probably the best indicator to monitor if you want to know how risky Spain is viewed by investors.

In other news, the yield on Italian 10-year bonds rise to the highest level since January.  Again, this is a measure of how risky people feel it is to loan money to the Italian government.

Price of Oil and Gas Falling

Oil prices have been falling the past several weeks.  This is probably a combination of several things.  The global demand for oil has been dropping in the face of an economic slowdown.  In other words, as there is less economic activity, that means fewer companies need to use oil for their vehicles, and fewer consumers are driving around to do their shopping or traveling, which means they don’t need as much oil.  Anytime demand for something falls, in the absence of any other changes, the price of that thing will fall.  We’re also looking at the value of the U.S. dollar going up in the face of all the financial concerns going on overseas.  So, if one U.S. dollar buys more oil, then the price of oil as expressed in U.S. dollars goes down.

The bad news with something like this is that it represents some economic slowing and may impact the bottom lines for many companies.  The good news is that lower oil prices typically lead to lower gasoline prices.  And when consumers are paying less for gas, there’s a little more left over for things like clothes, computers, travel, etc.

Therefore, per therules I laid out, here is what happened:

- On the close of Fri May 11, the price of DBC was so far below the 10-month closing average (assuming it was the last day of the month) that it would almost certainly not be a “buy” by the end of the month.  There were only 13 trading days left in the month at that point, and during no 13-day period out of the last 30 such periods had the price of DBC risen more than the deficit that DBC had earned at the close of May 11.

- My rules dictate that I continue exiting the DBC position, in this case meaning to “sell” because it was a long position.

- Ideally, I would reduce the position by 1/13th each day until the end of the month.  But to minimize commissions, I buy 5 days’ worth at a time.  So, 5/13ths of the position is about 90 shares.  Thus, I did a “sell” of 90 shares of DBC at 5 minutes after markets opened on May 14.  I will do another round of what is left five trading days from now if the conditions are still warranting the early exit.

All of this is accurately reflected in my current portfolio now.