How to Make Sense of This Mixed-Up Market

By George Leong

The current market action will soon turn to selling. I’ve come to that conclusion because what the current stock market is doing is really not normal, and a correction will certainly come.

I’m not saying the end is near. In fact, I feel there are more gains to come, but the ride will likely be bumpy and riddled with risk.

When I objectively evaluate the market, I see many stocks, even those that have horrible fundamentals, rising to levels that just don’t make any sense to me.

I’m actually perplexed. The higher market trading has proven to be much more sustainable than I thought it would be at the end of the first quarter. You can thank the Federal Reserve for a boost in your 401(k).

The new records set last Wednesday by the S&P 500 and the Dow Jones Industrial Average were really not warranted. Or at least not yet, unless the economic recovery picks up and corporate America delivers strong revenue and earnings growth and not the diluted results that have kept Wall Street happy.

Because of the Street’s reduced expectations, I would expect companies to report some blow-away quarters. We will see for sure when the earnings parade picks up starting this week. Don’t just settle for an inline or slightly better-than-expected quarter. If there’s any real growth, you’ll see much more.

And then there’s the housing sector, which will be in the limelight tomorrow when the housing starts and building permits readings for June are released. We saw some stalling in the housing sector in May, so it will be interesting to see if the housing sector continues to stall or renew its growth.

Then there are the home prices across the nation. The S&P Case-Shiller Home Price Index has been on a nice rally since early 2012 as reflected in the following chart:

Chart courtesy of www.StockCharts.com

Despite the steady rise, home prices continue to be well below their peak in 2006, which, of course, was driven by easy money and the subprime mortgage fiasco in the housing sector, when the banks were lending out money to anyone and everyone who wanted a house.

The housing sector has improved since then, but there’s still some froth in the current housing market, given the advance as shown in the chart below:

Chart courtesy of www.StockCharts.com

Note the recent upside gap as indicated by the blue oval in the chart of the SPDR S&P Homebuilders Index above. It appears housing sector stocks want to push higher after the correction in May and June, but I really do expect to see resistance, based on my technical analysis. I still feel the best gains in the housing sector are behind us for now.

At these current levels, I would be a seller in the housing sector—not a buyer.

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