This market is just like that great scene from the Bogart & Bacall classic directed by Howard Hawks.  Not the steamy love scenes or the chase scene or the tension filled dramatic scenes — but the credit roll at the start of the movie.

We know something really cool is coming, but there’s a lot of preliminary tripe to suffer through first.  So, we watch the 5-7 point fits and starts, hoping something good happens before we run out of popcorn.

We had early strength following generally positive earnings reports and despite a mixed December new housing sales number (reported down 7.3% from November but up 8.8% from Dec 2011.)

The non-annualized, non-seasonalized numbers from the Census Bureau are presented below.  There’s a lot of good historical economic data available on the website that rarely jibes with the MSM versions which are basically re-written press releases.

The columns represent (from left to right) total, Northeast, Midwest, South and West for 2012 and comparable periods in 2011.  Total sales have obviously picked up versus last December, though primarily in the South and West.

2012                                                                2011

 

It might seem to some like I’m a bit of a housing bear, nay saying all the “great news” coming out.  I agree there are pockets of strong sales and price increases such as San Francisco.  But, most of the uptick in construction has been driven by multi-family.  And, most of the uptick in sales has been, IMHO, driven by a steady drumbeat of glowing reports produced by the very people who want you to buy a house.

While it’s entirely possible this hopium will catch hold and actually instigate a recovery, it’ll be several years at best before the overhang of underwater current homes and bank-owned foreclosed homes works its way through the sales cycle.   If the country dips back into a recession (or remains in one, depending on your POV) or if interest rates begin to tick back up — good luck with a housing recovery.

I spent a year in the 90’s working for a well-known institutional asset management company specializing in real estate.  While the experience was, on the whole, miserable, I did enjoy a great relationship with the company’s economist.  He and I spent many hours trying to crack the price model nut.  From every angle, it always came back to employment that ultimately drives prices.  Seen any real employment growth lately?

Some would argue inflation also plays a role.  I would generally agree with that, but housing tends to lag the inflationary cycle, not lead it.  First, you need jobs — especially in an environment where lenders expect borrowers to have an actual income.

It’ll be interesting to see how NE sales (essentially flat) do once we’re past the Hurricane Sandy sphere of influence.  Right now, it’s too easy an excuse for lagging sales of everything except generators and batteries.

Currency markets are mostly quiet this morning, with the dollar showing some indecision.

Since we hit our downside target at the white .786 on the 13th, the index has been non-committal.  My best guess is a repeat of the .786/.886 retrace down to the red zone before DX takes off higher, but this is neither assured nor necessary for our equity forecast to play out as expected.

continued for members…

The large white rising channel has held for almost two years now, and I see no reason for it to yield at this point.  Note also that the recent falling red channel is essentially a repeat of the one traced out between Apr 2010 and Aug 2011.  So, a breakout would be very dollar bullish/stock bearish.

The white .786/.886 at 85.47 – 87.07 intersects nicely with the purple 1.272 and 1.618 at 85.78 and 87.69.  So, this remains my medium-term target.  First, however, DX will have to contend with the top of the purple channel — which might not be all that easy.

I sometimes play around with the purple channel (I lead a very exciting life, I assure you.) If we shift it slightly, the action since Apr 2012 looks more like a breakout and backtest.  Note that the latest falling red channel features the exact same slope as four previous channels.  Each has been followed by a strong rally.

The above chart also illustrates the essential conflict between the falling white channel and the rising red channel — and why my 87 target is iffy.  If one combines the top of the white channel and the bottom of the red channel, it forms a pretty obvious triangle (highlighted in yellow) that’s gradually narrowing.  The apex is way out in 2021.

But, before DX can even get close to either bound, it must first break out of the smaller triangle formed by the bottom of the small white channel and the last two highs (highlighted in red below.)

The top of this triangle is currently around 83, which is roughly the .618 of the June 2010 to May 2011 plunge from 88.91 to 72.86 (white pattern below.)  It intersects with the big red channel midline and rising white channel midline at that price level in the next few days, which supports my notion of an imminent top.

I’m still working on a longer-term forecast, but I think the most likely case at present is a ramp up to the .618 (the shaded circle) that coincides with an equity sell off from 1509-1515, followed by a pull back (corrective wave in equities), then a push higher to test the .786 or .886 around April – May.

SPX is still hovering around 1500, still locked in the little channel began back on Jan 2.  It currently ranges from about 1487 to 1510.  Traders might wish to play the swings from top to bottom, with a decent trigger point being the embedded purple channel.