Monday, November 13, 2006

Housing as a market predictor

The graph below started with Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co. She decided to compare the recent market performance against the housing index and see what came out. The result was so scary that the plot was little more than a trading-desk legend until recently.

It shows the S&P 500 index on a 1-year lag in blue compared against the NAHB Housing Market index in red. The two track to such a high degree of correlation since 1994 (when some of the elements of the housing market index changed) that it's almost impossible not to stare. If the relationship holds up, the S&P would be down almost 50% within a year!!!

A lot of this relationship makes sense. Each housing purchase leads inevitably to bank activity, trips to home depot, hiring of painters and exterminators, furniture, etc, etc. Few things are as basic to the human condition as the need for shelter, and a lot of the economy drives from that.

I've been posting a lot about the bad news from the housing sector and I went looking for evidence that perhaps it wouldn't impact the stock market. I found the opposite.

I recommend you position investments DEFENSIVELY at this time.

Invest well,

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