Editor's note:
this column was originally published on Capital Essence's CEM News on November 10, 2007. It's being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.
Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday November 12, 2007.
In order to map out future direction, we ought to know where we're coming from. Stocks declined sharply last week amid worries about the wider economic impact of losses at financial companies and the growing ranks of consumers saddled with expensive mortgages.
Here are some of the recent negative headlines:
- Home builders had all reported losses in recent quarters.
- The nation's home builders' confidence for new homes market fell further in October, and a measure of their outlook remained at a record low level, according to the latest industry survey.
- The National Association of Home Builders/Wells Fargo Housing Market Index showed the overall confidence measure sank to 18, the worst reading on record for the 23-year old monthly survey.
- According to RealtyTrac, an online marketer of foreclosure properties, the number of foreclosure filings rose 30% from the previous quarter and nearly doubled from a year earlier. There are more than 635,000 foreclosure filings were reported nationwide - one for every 196 households.
- Both of the housing starts and building permits hit a 12-year low mark.
- Citigroup (C) said last week it expects to write down a further $8 billion to $11 billion in the fourth quarter due to credit- and mortgage-related problems.
- Wachovia (WB), the nation's fourth-largest bank, said last week that the complex debt instruments it held in its portfolio declined in value by an estimated $1.1 billion before taxes in October, leading to a $600 million loan-loss charge for the current quarter. The bank had reported $1.3 billion in pre-tax losses in the third quarter tied to pools of debt backed by home loans.
- Fannie Mae (FNM), the largest buyer and backer of home loans in the country, said Friday its profits fell by half over the last nine months.
As bad financial news has been common place throughout the industries, it ain't any surprises to see both of the Banks and Home Builders Indexes trading at level that had not seen since 2004.
Chart 1.1: Bank Index. The group is currently trading at key support at the 50% Fibonacci retracement. Resistant is about 100-103.
Chart 1.2: Home Construction Index. The homies pulled back to support at the 2004's bullish breakout point. Resistant is at 2006's low, about 540.
We've offered right here a couple days ago that: "in this business, news is best at top and worse at bottom". Whether we've seen the worse or not is remained to be seen. Though, as listed above, we've certainly heard a lot of disturbing ones.
However, if history is any guidance, then market is approaching a significant turning point. With President Bush's popularity reaches new low (according to the Washington Post-ABC polls, for the first time in his presidency a majority of Americans question the integrity of President Bush, and growing doubts about his leadership have left him with record negative ratings on the economy, Iraq and even the war on terrorism) as the presidential campaign heats up, politicians will do everything to restore voters' confidence, that's including printing decent and/or positive economy news to the front page. This, we believe, will provide the needed platform for a turnaround in the real estate market and so the financial market.
Actions speak louder than words. Despite the overall weakness, both of the Banks and Home Builder closed higher last Friday, up +0.53% and +1.59% respectively (see chart 1.1 and 1.2).
Chart 1.3: Standard & Poors 500. The index pulled back to key support at the long-term rising trendline. It has a layer of resistant that runs from 1490 to 1545.
In summary: if financials and real estate are causes of recent equity market's "bleeding", then latest actions in these groups suggested that the market is at or getting pretty close to a tradable bottom.
Until next time, good luck.
(By: Michelle Mai for Capital Essence)
Note: Michelle Mai writes technical analysis for Capital Essence and is the editor of Capital Essence's "Market Outlook" newsletter. To receive the daily edition, please
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