Until Housing Improves, Don't Expect Stocks to Rebound

7/28 - "Until we see a light at the end of the tunnel for home prices, the risks to the economy and the financial sector remain skewed to the downside. Indeed, partly as a result of the weak housing market, the index of leading economic indicators we track from the Economic Cycle Research Institute [ECRI] had fallen to a five year low, prompting ECRI to comment that "a business cycle recovery is no where in sight." We will know when home prices have dropped enough so that the inventory of unsold homes begins to come down. Clearly, we have not reached that point."

"Of course, the government's various relief efforts over the course of this credit and housing crisis have one thing in common - they represent a transfer of credit risks and losses to the U.S. taxpayer, and they ultimately weaken the credit and currency of the U.S. government."

"Turning back to the stock market, the odds seem to favor a continuation of the bear market rally that began mid-month. Sentiment indicators also support a further rebound in prices in the short term. Typically, bear market rallies retrace anywhere from one-third and two-thirds of the prior leg down in prices. In this instance, the prior decline from mid-May to mid-July was 240 points on the S&P 500, which fell from 1440 to 1200. A one-third retracement of this decline would be 80 S&P points, and would project 1280, a target we already reached prior to last week's setback. A two-thirds retracement would be 160 S&P points, which could take the S&P 500 back up to 1360, approximately 100 points above the current price level."

"We do not suggest that longer-term investors attempt to play this potential rebound. Bear markets have a way of reversing suddenly, and who knows when the next shoes will start dropping to restart the downward momentum. Until much more evidence develops to suggest otherwise, our assumption remains that the bear market is not over and that a lower risk buying opportunity still lies in the future."