Housing: Consolidation or Potential Crash?

By: Sol Palha | Tue, Aug 23, 2005
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"The truly educated man is that rare individual who can separate reality from illusion." - Source Unknown

From having sector strength score of over 111 the housing sector now has a score of only 53 and has dropped from the top position to number 13 in a matter of months. All the housing stocks are flashing negative divergence signals on our proprietary indicators as well as on some basic TA indicators as illustrated below.

We have at least one Negative divergence here on the 2 year chart; a break below 43 will breach the long term up trend line and could signify a rather strong correction in BZH. A negative divergence is when a stock puts in a new high but the TA indicators do not confirm this new high.

Two negative divergences and we are getting close to long term support; a break below 56 could take us all the way to 40.

One negative divergence, a channel formation which looks unstable; a break below 800 will take us to the bottom of the channel around 700 dollars and a break there will most definitely result in us testing the 600 dollar ranges.

This is a very interesting chart because it's the only one that has two positive divergence signals and our proprietary indicators have flashed another 3 also. Based on the volume of positive divergence signals it appears that a bottom has been put in; Gold will slowly gains strength over the Housing index and the ratio will start to move up (as it will take more of the housing index to buy an ounce of Gold)


Every single chart is exhibiting one or two negative divergences; this is usually not a good sign and signifies that a top could be close at hand.

So much money is racing into the real estate sector because most individuals do not understand the true function of Gold; in fact they won't even believe it when you tell them as this valuable lesson is no longer part of any school curriculum. To make matters worse most people don't even understand what inflation is; for most it is an increase in prices rather then an increase in the money supply. So what are people do when they want to put their money into something that will hold its value. Money is no longer backed by gold and every currency has its own inherent problems; they are all rotten it's just that some are more rotten then the others. Individuals are scared and they are looking for ways to tuck away money for their golden days; it appears that for now that real estate is the masses vehicle of choice. In fact it's becoming a global problem; we have a global equity boom and at some point in time this bubble has to pop. However one must understand the main reason for this boom is that individuals are being forced to speculate with their money; there are simply not enough places one can put ones money and earn a fair rate of return. (Remember most of them do not understand the principles of inflation or what the true function of gold is and hence they race to find alternative investments that will act as a buffer against these unpredictable times. History shows that most of them will choose the wrong investment).

According to the Economist global money supply is increasing at a rate of 20% plus; those were the figures for last year and it appears that this year things can only but get worse. Now one can begin to understand why the price of so many basic commodities has taken off and why we are in the midst of a global real estate bubble. They have just launched a new program in California that provides mortgages to illegal aliens. It seems that the big chaps will stop at nothing to keep the housing market alive; its funny they think of the illegal aliens only after the market has reached insane levels. One of the big banks taking part in this is Citibank, so it's just a matter of time before this program goes nationwide.

The above charts quite clearly illustrate that while the housing sector is not crashing it certainly appears to be topping. One of the main ingredients in a house is lumber and this market topped over 1 year ago; one would think if everything was fine that this market would be putting in new highs but this is not the case. Read our previous article on this subject, Lumber and Real estate.

If you look at the last chart you will notice that it took 1.75 units of the housing index to buy one ounce of Gold; today it takes only about .81 to do the same. Notice also that it appears that a bottom has taken hold (based on the conditions stated above) and that Gold will slowly become the stronger of the two. These factors are not good news for the housing sector but could be potentially beneficial to the Gold and the precious metal sectors since this money will eventually have to find a new home. In addition to Gold there are few other sectors that look ripe for this money; we will realise that info here on a delayed basis in the future.

"Reality is what we take to be true. What we take to be true is what we believe. What we believe is based upon our perceptions. What we perceive depends upon what we look for. What we look for depends upon what we think. What we think depends upon what we perceive. What we perceive determines what we believe. What we believe determines what we take to be true. What we take to be true is our reality." - Gary Zukav

All charts provided courtesy of www.stockcharts.com



Sol Palha

Author: Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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