Earnings releases continue to come in healthy. The market is recovering a bit from last week - Friday being particularly a tough day due to options expiration.
I continue to be on the sidelines because of the strong disconnect between earnings and stock prices. The turn from oversold to renewed strength will be unpredictable. Maybe it happened today. Again, I believe in quite a few stocks long term, but in the short term they keep dropping 5%~10%.
There are two near term events that I am watching and factoring into my moves: Housing reports this week and Fed Meeting Aug. 8th.
HOUSING REPORTS
The housing reports will show widespread softening. This is not a surprise - lsat week's new home construction starts showed a slower than usual building rate. If builders are slowing, it's because the market is soft.
The key question is degree and speed. The median prices always distort the realities - for example, price changes on 2000 homes sold in Metro NY matter much more than the 40 homes sold in Podunk, Montana - but the statistics won't show that. So while median prices may move up across the country, what matters to most of us is the metro areas: LA, SF, Boston, Chicago, San Diego, NY, etc. If the markets are concerned with consumer spending, then they will be concerned mostly with consumer spending where the masses of consumers are: in the metro areas.
The statistics need to be carefully analyzed even at the regional/local level. As the Silicon Valley Business Journal reported last week, SF median prices are also distorted by volumes. It cited statistics that showed much more home selling in Palo Alto than San Jose. That matters because Palo Alto homes are much more expensive and move the dial more. However, Palo Alto is more the outlier for gauging home price direction.
In any case, I am not sure how th emarkets will react. It could be positive. For example, a falling home price reflects success by the Fed and a possible inclination not to raise rates. Less home building and selling does slow the economy. On the other hand, falling home prices tend to make people feel less wealthy and less prone to spending.
It really depends on which matters more to the market: interest rate visibility or consumer spending.
FED MEETING AUGUST 8th
This is the event that matters. The Fed may choose one more rate hike (the last imho) or no more for now.
I am considering the following scenarios in combination:
1. Market likes the housing results and the Fed response
2. Market likes the housing results and not the Fed results
3. Market doesn't like the housing results and likes the Fed results
4. Market doesn't like the housing results and doesn't like the Fed results
I am kicking out #4 - all evidence shows that the economy is humming along. I also think the market overselling is based on assuming the worst. Put another way, the market has assumed scenario #4, so it can't get much worse.
So that leaves 1 positive and 2 mixed scenarios. If you believe - as I do - that the market is primarily concerned with the Fed, then it's really two positives (#1 and #3) and one mixed (#2). I am therefore positive - especially in the face of all these positive results.
I am only waiting to buy because I want to see how the market responds this week to the housing reports. It is likely that the drop in housing as a deflationary signal will matter more than concern over future economy results driven by consumer spending.
