Uh Oh, breakdown?

Double dip talk picked up on two factors earlier this year; first on the flash crash which changed an optimistic outlook on the economy into a gloomy one; and the housing/employment mix. I have argued that the flash crash was just a very quick correction - one that would have taken place over several months similar to 2004 versus several minutes in early May. The latter factor I was taking a wait and see approach because I believed that the flash crash would effect the economy to some extent like the crash in the fall of 2008 stalled out global business but I was unsure how much it would effect it. Further, I was taking the optimistic view because I believed everyone was (and is) quite bearish on the economy and a "double dip" was forthcoming. Since the crash, we have seen employment figures miss on the headline (though improve on the hours and earnings side) and housing stats basically decline. Further industrial and small business metrics have been mediocre as well. Thus the fundamentals are not exactly improving - at the same time they are not diving like they were in 2008. In short, this "flash crash" has effected the economy but it appears people in the business community were ready for it.


While some sectors were ready for the flash crash, some sectors have not bounced back and threaten another leg down. As the chart shows for the Dow Jones Homebuilders and the Philly Housing Index, their underperformance versus the S&P is about to break lower and make new lows. If you remember, in 2006, as the chart shows, both of these indexes rolled over a whole year earlier than the bull market. Part of the massive bearishness we are seeing in the market at the moment perhaps revolves around this movement as we all saw housing having issues but nothing unraveled to months and years after the peak in 2006. On the chart there is a clear range drawn from the lows in 2007 through last Friday. Both remain below the 13 month moving average which is bearish and now they are threatening to take out those lows of the past 3 years - four bounces more specifically. If this one fails, then it appears the economy will be at severe risk and another leg down in housing will be forthcoming.

The most troubling thing about this factor is simple: if these housing indexes begin their break to new lows, chances are pricing and demand figures will follow. For the economy to improve, people have to be able to sell their home to move to productive areas that meet their skill sets. AT the moment, our economy is suffering from structural unemployment - skill sets in the wrong regions. If people can be mobile, they can take their skill sets to another part of the economy and gain employment. If they cannot sell, then the are discouraged workers and less productive leading to higher unemployment and pressure on wages where there are large supplies of workers for few jobs. Thus in my opinion, housing needs to be loose to allow for this structural unemployment to unwind some. Till then, no matter what the Fed does with policy, the unemployment issue will probably remain a problem.

With unemployment an issue, the economy will continue to flounder and this will put a serious dent in my bullish thesis if a major break in these housing indexes follows.

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