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Weighing The Week Ahead: Time For A Turn In Housing?
By: Jeffrey A. Miller   Monday, February 20, 2012 7:50 PM
Is that counterproductive enough for you?



Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. We voted "Bullish" this week.

(For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I'll do my best to answer.)

The Week Ahead

This a light week for A-list economic data.  It is a short week, influenced by the effect of last week's options expiration.

The initial claims series is the single most important report to watch right now, and we'll have an update on Thursday.  There are revisions to Michigan confidence (Friday), and also some housing data, which might grab the focus.

Europe news is a wild card, but I see less concern and more emphasis on the US economy.

I monitor news and economic data every day in my diary at Wall Street All Stars (subscription required, but I have some membership discounts available for my readers).

Trading Time Frame

Our trading accounts have been 100% invested since December. Felix caught the current rally quite well, buying in on December 19th. There are now many solid sectors in the buy range. The overall ratings have improved, helping us to stay invested while many have been in denial for the entire rally. This program has a three-week time horizon for initial purchases, but we run the model every day and change positions when indicated. Felix has been more confident than I have been on the trading time frame. This illustrates the importance of watching objective indicators instead of headlines.

Investor Time Frame

Long-term investors should be aware of the rapid decline in the SLFSI. Even for those of us who see many attractive stocks, it is important to pay attention to risk. In early October we reduced position sizes because of the elevated SLFSI. The index has now pulled back out of our "trigger range," and is declining further. This sort of decline has been a good time to buy stocks on past occasions. Worry is still high, but has now declined to a more comfortable level.

Even though stock prices are higher than in October, the risks are much lower. I am increasing position size for risk-adjusted accounts. (We cut back by about 30%). I am also looking more aggressively for positions in new accounts.

Our Dynamic Asset Allocation model is still very conservative, but starting to change into equities. For several weeks I have joked that it is rather like the Nouriel Roubini of our methods. Dr. Roubini is now becoming more bullish. There is nothing wrong with this! There are many successful market strategies. The risk/reward balance is a personal matter.

To summarize, we have become much less conservative in all of our programs, There is still risk, but as our indicators become more positive, we can and should become more aggressive. For new accounts we are establishing immediate partial positions, using volatility to buy favored names and selling calls for those in the Enhanced Yield program. This program continues to work very well, meeting the objectives of conservative, yield-oriented investors. It follows our key precept:

Take what the market is giving you.

I have been repeating this each week, because it is by far the most important message.  It is better than trying to time the market.  You can buy great dividend stocks at reasonable prices with the chance to sell call options at inflated prices. If the stocks do nothing, you can still get almost 10% per year from dividends and call premiums.

This does not work for those selling long-dated calls. It requires some active management, selling calls with a month or two before expiration to capture the most rapid time decay.

The Final Word on Housing

I do not have a strong personal feeling on housing.  I understand the need to work off the inventory of abandoned homes and to deal with foreclosures.  This is the widely-cited shadow supply.  I know also that there is shadow demand from new families and people unwillingly living with parents.

Housing demand is linked to perceived affordability and employment.  Here are some sources that we should all consider:

And finally, the conclusion from Calculated Risk, a source we all respect from the early and accurate analysis of the housing market decline.  This conclusion is careful and nuanced, distinguishing a bottom in prices from a bottom in sales.  Read the entire article, but here is the key takeaway:

And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.

I expect this to be an active topic of discussion this week and during the Spring.  Any sign of life in housing would help the economy, and would provide some new sector and stock ideas.


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