Begin Accumulating (With Caution): Coppock Curve

If you have been sitting on the sideline waiting to dip your foot in the market but believe this may be a "sucker" rally, here is something to consider. The Coppock Curve turned upward from a position below the zero line for the first time since this bear market started thus triggering a buying signal. Please recognized that the Coppock Curve is utilized as a tool to identify the bottom of the market after which it had already occurred. You can see that the market closed at 8500 on May 29th, 31% above the low of 6470 in March. A simple way of looking at this is to view the indicator as a low-risk, long-term buying junctures. The major risk faced the market at the bottom, the possible collapse of Citi Bank and Bank of America, was alleviated.

If you bought during the March low, you were taking major risk and thus should be rewarded with your investment doubling, tripling, or quadrupling in short period of time.

For those who are waiting to buy into Mutual Funds or Index Fund, I suggest you begin your accumulation with cares. I favor company specific approach because I believe the earning power for banks will not be back to where it once were. More on this in my later article.

The Coppock indicator stood at -380 at the end of May 2009, upped from -386 from April 2009.
During the great depression, the indicator had two false signals in February 1931 and August 1931. The true sign of the bottom occurred in August 1932 when the indicator reached -676 and reversed up to -635. A 42 points move. What we are witnessing could be a false indication. I would have to see the indicator decline in June to make a more bullish call.

This could be the beginning of a greatest investment opportunity if you look in the right place. I suggest you begin accumulating shares but with caution!

Art

Home Price Won't Make "V" Shape Bottom

Many investors and potential home buyers are talking about the bottom in the housing market. As a potential home buyer myself, I am very excited at the opportunity to purchase a home/condo at a reasonable cost. However, I am not betting on the profit potential that real estate provided in the past years. If you are an investors, here are things to consider:

1. Property must be purchased at a deep discount relative to the cost of maintaining. Another word, the potential income/saving (rent or opportunity cost of rent) should equal or exceed the cost of carrying the property (mortgage + tax + maintenance).
2. You must have enough liquid income to support the cost for at least 6 months due to the uncertain economic environment.
3. Banks are holding large amount of foreclosed homes. This mean "pending supply" is coming to the market once price improve. This is one factor most people over look!
4. Expect the homeowner's association fee (HOA) to rise because high foreclosure resulted in less money to the association. The remaining are have to subsidize the lost revenue.
   

The video below gives a great insight into where we are in the housing market.

Some of the headline news you see may be misleading because properties are specific to the location. Some of the local market here in the bay-area are receiving multiple bids which usually signal a bottoming process. This doesn't mean that profits will return because buyers have more realistic expectations for the return. I highly doubt those bids are comparable to the peak level.

There are advantages in purchasing at this times such as the $8,000 federal tax credit (for those who qualify), shelter from taxes, and inflation hedge.

What separate good from great investors are their abilities to control their emotion. Great investors make decision rationally and not emotionally. So remember to set you emotion aside and think clearly before leveraging up with a mortgage. Housing market is approaching bottom, but probably won't make a "V" shape bottom.

Art

The Handle in Gold Is Forming

On April 9, I wrote about the cup with handle pattern for gold. It turns out ,the handle has formed nicely since then. Attention turned away from gold as the Dow gained 7.46% (584 points), BofA gained 62.75%, and Citi rose 33.7%. Gold on the other hand gained a modest 6.77% and Newmont Mining gained 8.71%. This quiet move is forming a more bullish pattern. As you can see from the figure below of $GOLD ON 4/9/09



The chart below shows $GOLD closed today at 938.30. The "safety trade" is turning upward as the market (Dow) moved higher.


I do not recommend trading this if you can't wage your risk because gold can do anything. If you believe in the "cup with handle" pattern, buy some now with tight stop or a break above $1,000.

Art

Qualitative Reasoning Behind Bear Market Rally

Bear market rally are difficult to understand for unprofessional investors, and even for some professional investors. I've been studying the action and reaction of the bear market for the past few months with some thoughts to share.
Bear market action is a primary down trend (sell-off). By contrast, reaction is a reversal of a down trend (rally). Novice investors asked how is it possible that we have a rally in a bear market? There's no single explanation to that answer but I've come up with some qualitative reasoning behind the rally.

Primary Sell-off
During the market sell-off, economic and earning data are bad. Often time the data accelerate downward creating momentum selling to occur, creating primary sell-off.

Secondary Rally
At some point, that acceleration has to stop or slow down. Those who have been shorting the market cover their shorts by buying back the stocks, creating buying pressure. The key catalyst is the deceleration in bad data. Statistically, nothing accelerate at constant or at faster pace forever thus any slowing may perceive as "better" situation. Trader and investor sense that things can't get worse and as a result, they buy. This create a secondary rally.

Resume Sell-off
The next question you should ask yourselves is, will the economic data continue to improve? Will the data level-off or contract again? Stocks can move rather quickly in both directions so you have to make a judgment call whether the stock overshoot the real economic growth or not. If the economic activity level-off, that catalyst of growth is taken away and selling may resume.

Current situation
Things appear to be less bad. Unemployment rate is slowing, and yet still rising. Foreclosure ratie is slowing, and yet still rising. Could we be in a secondary reactions stage where things appear to be less bad? We won't know until after the fact. The next few quarters will be a true testimony to the bull because we are going to see if economic data can continue to improve.

Traders trade based on statistics by comparing downside risk to upside risk. Economic data are just statistics. Investors buy based on value. So don't let statistic play tricks on you.

Art

Housing Market: Where we are

I wrote two articles regarding the housing market (Housing Interpretations & Revisit) which highlights housing market condition for California. I've updated the current data as well as added new indicators to suite California better home price better. Let’s dive into it. I’ve gathered a series of data to study what drives our home prices. As my previous study and argument have shown, it is income. Here, I took a new set of data called House Price Index for California (found on St. Louis Fed under Series ID: CASTHPI) and Per Capita Income in California (Series ID: CAPCPI). Using this data I created an index which begins in 1975 at 100 and extends to 2008. My finding shows that home prices are highly correlated to income. The obvious was a rise beginning from 2000, after the well known tech-bubble. I would note that this set of data contains all California homes including those in the distress area such as Stockton, Merced, or Antioch.

It is obvious from this chart that home prices need to correct more to equilibrium level. You ask, “This is crazy, how can prices fall much futher?” Let’s take a look at specific area such as one that I live in, San Francisco.

To find this, I’ve taken the data from the Case-Schiller Index which tracks areas, such as Los Angeles, Phoenix, and Las Vegas. More detail can be found here. Taken only San Francisco data, I plotted the home prices index from 1987 (when Case-Schiller Index was introduced) against Per Capita Personal Income in California. The chart shows sign of "bottoming out". The data is incomplete as the Fed hasn’t released the income data for 2008 yet, but as an educated guess, that figure is likely to be slightly higher than 2007. We should see that figure dip or remain unchanged in 2009, but I’m not one to forecast.



The Federal Reserve and the government are doing their best to bring cost of borrowing down to stem home purchasing. One may say they’ve succeeded but I argued that cost of borrowing is the remedy. Given the house was priced at the peak, would 0% financing help those who did not have the income to support their purchase? A simple number crunching revealed that since 1975, income has been more closely correlated to home price, not cost of borrowing or mortgage rate.

Another new indicator I discovered is the Coppock Indicator. I won’t go into detail about it but long-term investors have used this indicator in purchasing stock for the long-term. How you read this chart is simple. You first ignore what is in the positive range and focus when chart dip into the negative range and turn upward. Thus this chart had given us a buying signal back in October 1991, May 1993, and April 1996. Note, this chart isn’t perfect, but what it does best is reduce the risk one takes in making a long-term purchase. Based on what I see here, I don’t see a reason to rush into the real estate just yet.



I’ve heard people are rushing into make that purchase before price “sky-rocket”. I highly doubt that price would “sky-rocket” as price tend to overshoot on the upside. The same goes on the downside.

Summary and Prediction:
Home price in San Francisco is bottoming. Home price in distress area such as Stockton or Merced has some more to fall. With historical rate at 4-5%, it will be a great time to buy if you can afford it. Even if rate was at 10%, it will still be a great buy if you can afford it.
Income drives home price and not cost of purchase which many bankers will tell you.

My prediction for the mortgage rate is that it will remain at historical low rate until at least the end of 2009 because the Federal Reserve is targeting 4.5% to stem home purchase as well as make bank become more profitable. Once the bank shows sign of life, the Fed will slowly hike the rate when inflationary fear creeps in. I suspect the first rate hike will come sometime in the second half of next year if not later. When that happens, you will want to be in real estate or commodities as inflation will surely eat away any cash you have.

So do buy real estate, but buy for the right reason. We all got into this situation because bankers said rates are at historically low.

Art

Stock to Sell: Carlisle Companies Inc. (CSL)

On April 29, 2009, I recommend buying shares of Carlisle Companies Inc. (CSL) when the stock was trading around $22.30. Since then, the stock has risen substantially given the time period of the purchase. If you are nervous about the recent rally, I urge you to take profit in this name, as I have done so today at $24.00.

The rally can easily take the Dow to 9,000 but I am not banking on it. Even if the market continue higher, I currently have other positions that will benefit from such move. The risk/reward for Carlisle has changed for me. If you are compel to hold the stock, it would be ok but be prepare mentally for some pull-back.

Carlisle closed today at $24,13. A modest gain of 8.2% in just a few days is not so bad. This is 3x of the dividend rate you would receive as of today closing at 2.6% yield.

Although I closed my position, I will continue to monitor Carlisle closely and would like to re-purchase the stock near $22 or 2.8% yield (previous resistance).

A stock can't go up in straight line. Same goes for the market. I am getting defensive as we speak.

Art