Housing, Equity market rallies near an end?

     I love ratio charts.  When used correctly, the markets often tell a story.  Two real estate related ratio charts are telling a hell-of-a story, and they scream caution.

     The first chart is Real Estate/Housing.  This ratio has led the market by 1-3 months at major turning points the past couple of years.  This ratio moving lower is bullish and higher bearish, as the home-building stocks are more economically sensitive and dividend paying REIT's are a nice place to hide out when the markets correct.

     You can see the downside momentum has stopped as RSI has formed a pronounced divergence. With a price bottoming pattern in place you can expect housing stocks will weaken over the next few months.  No problem, right?  Housing stocks are just extended, right??  Well....


     This second chart shows IYR/SPY. IYR strength generally indicates defensive posture by funds. The ratio could be truncating a targeted move lower and reversing higher.  Generally, you would say that bodes very well for IYR, but after a price analysis you can see the ETF completed a rising wedge top in September.  Therefore, it likely will not make a move much higher from here.  The chart is saying IYR will regain strength as the market heads south!!    

To recap:

Housing stocks look done for now on the upside.  They've had monumental runs in the last 14 months, but they need a rest.

REIT's are starting to see relative strength, but they have limited upside(read: downside is ahead).

My take -- We may have a bit more trading to the upside into the EoY, but this action indicates significant weakness in early 2013.

***UPDATE***: 3/5/13 Gosh this was wrong looking back wasn't it?  Perhaps it says something about how under invested folks were at the drop in November.  

Chart Obsevations for 9/4/12

The Dow Transports are getting increasingly weaker and are approaching a significant break down.

Shanghai has reached its downside measured move.  Does this mean stability will ensue as the European markets rally?

The QQQ:SPY ratio chart has met its upside objective.

Breadth measures are continually weakening, and now the Value Line Arithmetic Index is diverging from the major market indices.

Financial relative strength is coming to a very critical juncture.  It will tell you next 10% move. The large rising wedge in IYF suggests it will be to the downside.  *upside targets do remain on FAS and XLF*

Some bullish groups: pipelines, mortgages, metals, real estate, drugs

Groups that can bounce this week: semi's, nat gas, ag's

Spain has a pretty important date with the falling 200D moving average coming SOON.

Silver and Junior Miners are trying to lead the base metal space. These are bullish signs that we haven't seen in awhile.

High yield junk instruments, outside of JNK, are starting to bearishly diverge from other debt instruments.

The Yen is near a significant resistance level and looks poised to change the FX landscape.  I have no clue what it really means.

Utilities still look like shit.

When you back the VIX out to a weekly chart you can see a pretty clear double bottom forming targeting 43.

Inflation is going to be a pain in our asses for quite some time.  DBA:SPY RS chart has formed a head & shoulders bottom.  >>>>>Grocers also look like shit.  See SUSS and it's M top.

DBA looks ready to break its consolidation and join the base metals in a rally leading up to the Draghi speech this week.

Patents heating up

As attention turns towards patents based off this weekend's court rulings, I'm taking a look at the Ocean Tomo 300 patent index.  The index is made up of stocks with the largest % of intellectual property value vs book value.  This link has some background on the index, components etc.

  

There is no precise way to play this potential break out but be aware that the investment world is now looking harder for valuable intellectual property.  A couple of popular patent plays VHC and IDCC could get some love off of this news.  

Some Observations

US Dollar:S&P 500 correlation is rising on a ST time frame and bottoming on the weekly.

The Euro is at some serious horizontal resistance and the top of a bearish wedge.  Does the market expect more Euro easing soon??

Breadth is diverging across the board.  

China is getting weaker and weaker even though most world markets are rising.  You've got to expect China will lead the next leg lower in the markets.  

The CRB:SPX Ratio is forming a bullish head and shoulders.

The CRX:CRB is in a bullish consolidation.  It looks like commodity shares are going higher.  

Restaurant index is shaping up to be quite bullish in the short term.  Some names I like long include: MCD, PNRA, BWLD, DIN

The action in junk bond ETF's JNK and HYG suggest risk is still on.  

IBB:XBI ratio is starting to signal RISK ON in the space.  

    

Bullish percent indices signaling trouble?

I noted the slope in the NYSE bull % index yesterday on stocktwits yesterdayhttp://stocktwits.com/AaronJ. As you can see this is a significant change in character from all the other bull market rallies since the major lows of 2009. This simply tells us there are fewer charts standing on firm ground. To make the analogy literal imagine trying to run up a hill with sand up to your knees.

I'm particularly concerned with the Nasdaq Composite bull % index. Notice during this summer rally the index has bounced around the 50 level after falling from the bullish 70+ area. When these bull % charts bounce around the 50 level after it leaves an extreme, it tells you the larger trend is changing.

Looking at the summer of 2010 you can see the indices did this same dancing. The key difference was the indices were consolidating and not advancing. You can also see the bearish divergences between the bull % indices and price of the markets have been building for years.

It is safe to say this evidence is a concern to the longer term bull case. My hypothesis is the major indices will double top if these indicators don't significantly improve(note it is just a hypothesis).  However, there are strong bullish seasonality factors currently in play and we need other evidence to act on any hypothesis. At this point, who knows when the music stops?

***Update*** 3/5/13 Obviously this was poor interpretation of these indicators and we will try our best to keep this kind of crap off of the site in the future.  

A look at SPY

This is my daily view of the S&P 500 ETF.  We are currently trading below the lower trendline of a pattern associated with market tops.  With major long term resistance at 142, the bears have two significant levels to trade against.  Until this changes, I must maintain a market neutral stance. That said, the moving averages and rising trendline clustered together give a very powerful support level for bulls to trade long against.  If that cluster of support is clearly lost, there may a sharper drop in the markets as there is no strong support untill 135.80.  I will wait until the market leaves the congestion zone to chose my positioning.  Until then, trade em' well.