Analysis, Perspective, Trading Strategy
Disorder in the Markets, the Economy and Life Could mean wide open skies for one Homebuilder
By Joe Duarte on August 4, 2019
odds are higher for a continuation of the price decline in stocks than
they have been at any time since October of 2018. In fact, the stock market
maybe within one or two more bad days of making what could be a significant
top if it hasn’t already done so.
The Fed Laid an Egg
The Federal Reserve, as I forecast in my prior two weekly commentaries
set the stage for the market’s current volatile trend as Mr. Powell’s
press conference, just as I expected, proved to be the catalyst for
the rising uncertainty in the markets. Moreover, with new tariffs on
China, increasing signs of a slowing global economy (think China’s
wobbly banking system, Germany’s entire bond curve with negative yields
and Australia’s increasing housing problems), combined with a softening
of growth in the U.S. economy (think Chicago PMI at 44 and falling
consumer confidence), it’s really hard to understand why Chairman Powell
would suggest that the July 31, quarter point drop in the Fed Funds
rate will be a one-off affair.
Yet, he did and the markets responded. So we now have ridiculously
low bond yields and a very skittish stock market, where precision investing
and strategic thinking are the key to success.
Skyline Champion Takes Off as Bond Yield Collapse Spurs Mobile
For several weeks I have noted that the key to stock prices was tied
to the bond market. And that perception has been proven correct, as
the U.S. 30 Year Note yield (TNX) is now decisively below 1.9% as bond
traders price in a significant slowing of the economy.
The odds are higher for a continuation of the price decline in stocks
than they have been at any time since October of 2018. In fact, the
stock market maybe within one or two more bad days of making what could
be a significant top if it hasn’t already done so.
That said, there are no guarantees for an improvement
in the housing market, although the action in Skyline Champion (SKY),
a stock I recommended on June 19, 2019 suggests that the premise of
low cost manufactured homes is increasingly attractive both to investors
as well as the general population (think the MEL continuum). Certainly,
the rally in SKY is not surprising, given the fact that the company
gave very positive guidance in its previous earnings report, and that
it came through with a nice earnings beat in its most recent missive.
All things considered SKY beat its earnings expectations by 0.02
cents per share as revenue increased by 15.4% in Q1 2020 compared to
the prior year. More important the company delivered a profit compared
to a loss YOY, as sales rose by 20%. Even better, SKY’s future looks
bright and the company continues to add manufacturing plants in the
U.S., while improving its balance sheet by increasing its cash on hand
and borrowing capacity significantly.
So even in these troubled times, owning shares in SKY as long as
the uptrend remains intact make sense to investors who are willing
to take some risks.
It’s MEL Decision Time
Well, the fights between the Fed and Mr. Trump and Mr. Trump and the
Chinese are in full swing. Meanwhile the Market-Economy-Life (MEL) continuum
has a decision to make. Normally this level of bond yields should be
a positive for mortgage rates. The question is whether people will open
up their wallets in response to the changing interest rate environment
and the market’s response. Let’s not forget that the 401 (k) plan and
the HELOC are the backbone of the financial decision making process for
many Americans. Thus, it is the interplay between the bond and stock
market, as well as the employment situation that will fuel the next round
of decision making for consumers. Furthermore, even as
mobile homes are en vogue, it will be interesting to see what happens
in the much larger conventional housing sector over the next few weeks.
Of course since it may take a few weeks to get the official data
stream on housing, I will be doing my Peter Lynch thing (kicking the
tires) and watching the action in home sales in my daily travels to
see how things develop.
Specifically, there are three houses in two distinct areas that I
have been watching. One of them is not a very attractive home which
has been on the market for $500,000 for several months. It is clearly
overpriced, and even though it is in a very attractive neighborhood
where other similar priced houses have been steadily selling, given
the amount of expense likely required to restore this home, I would
not expect it to sell without a significant discount from the current
asking price. However, if this house sells now that mortgage rates
are likely to fall, it would signal that people who have been waiting
for lower rates have finally made their move.
The other two homes are in a trendy neighborhood favored by up and
coming young tech professionals and are in the $800,000 price range.
These two homes are exceptional, recently built homes with large lots,
multiple modern amenities, and “location.” But interestingly, both
are now featuring “REDUCED” tags on their For Sale signs, which means
that the asking prices are well out of the market’s current range,
a trend which is likely to increase (think Seattle is the first city
in the U.S. to report YOY housing prices declines.)
Furthermore, while the home above is more likely to have been paid
by its owners, both of the newer homes with the higher price tags have
already been on the market for over 45 days. This means that the sellers
may be getting itchy, since they are likely to still be on the hook
for $3000 plus monthly mortgage payments while they wait.
My point is that for MEL, it’s now about what lower interest rates
will do to people’s willingness to take risks on big ticket items.
If any of these houses sell in the next few days to weeks, I suspect
it will be a sign that those who have been sitting on their wallets
have reached their point of action. And if that starts happening on
a regular basis, it will be worth noting, especially in the context
of what’s going on in the markets and the economy. On the other hand,
if these houses linger on the market despite what are likely to be
ridiculously low mortgage rates in the offing, I would expect that
MEL is signaling that more serious problems for the economy have arrived
and may be accelerating.
Market Breadth Collapses
On July 19, 2019 the New York Stock Exchange Advance Decline line
(NYAD), the most accurate indicator for the stock market’s trend since
November 2016 rolled over, as I noted my concern in this space. Last
week I noted the incomplete recovery in NYAD and hoped that the line
would deliver a full recovery by delivering a new high on a Friday.
Unfortunately, thanks to the Fed’s ambivalence
and the ratcheting up of the U.S.- China trade war, NYAD has collapsed,
which means that until it can straighten up, the bears are back in
charge. Specifically, the key is what happens if and when NYAD hits
its 50 day moving average. A failure there will likely lead to a further
breakdown and more pain for stock traders on the long side.
Moreover, NYAD is not alone as both the S & P 500 (SPX) and the
Nasdaq 100 (NDX) indices both rolled over and are now testing key support.
Of some comfort is that both indices bounced off of their 50 day moving
averages on August 2. But this story is still evolving. Thus a break
below this key support would likely lead to a trip down to the 200
day moving average.
The silver lining of the current selling may be that the RSI has
fallen rapidly and that it is testing the 45-50 area which has proven
to be good support in the past six months. However, a break below this
area would likely mean a trip all the way to the 30 area which would
likely mean aggressive selling has taken hold of the stock market.
Stay Calm. Stick with what’s working. Hedge and be ready
to move fast if things change.
This market looks terrible at the moment. But because it is being
influenced by the news cycle, it could turn around on a dime as the
algos switch gears if the news changes. As a result, there is little
to do other than stay hedged, to use 5% sell stops, let the winners
ride, and cut the losses short.
Furthermore, much depend on the effect of the bond yield collapse
on people’s pocketbooks, and the potential for this decline in stocks
to become oversold in the not too distant future. So if the data starts
improving in the next few weeks, or Trump and the Chinese strike a
deal, especially when the market reaches a seriously oversold level,
as it is likely to do if things don’t change, that combination of events
may be good enough to start yet another move higher in stocks.
I own SKY as of this writing.
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of Trading
Options for Dummies, rated a TOP
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