Wednesday, August 8, 2007

Housing and Financials

Anybody will tell you that you've got to sell housing and financials nowadays. It's common knowledge right. I mean it only makes sense real estate is done and the financials are going to collapse because of subprime and Alt-A loans. Even Cramer can tell you that you've got to get rid of anything in this sector. Well let's take a look at the charts. The S&P is up 4.50% in the last 3 days. Pretty sweet. But wait a minute housing is up over 8%, FNM is up over 17%, the banks and broker dealers are both up over 8%. What the hell is going on? I thought these two sectors were toast. This very well could just be an oversold bounce heaven knows they've both been punished recently. However let me lay out another possibility. The panic selling the last couple of weeks may just have put some very good companies on sale for half price. Sure subprime is a problem but it won't last forever. I dare say most if not all the large banks are going to take some heat but I doubt that any of them have sustained irreparable damage. Perhaps people that don't necessarily follow the herd realized the other day that Mr. Market just threw them a slow ball right over the plate and all they had to do is swing. Maybe those same people also noticed the 10 year yield was back down around 4.75 which is good for the housing sector. Maybe those people also think that even though the housing sector is in trouble I doubt it is finished as an industry. You might also notice that the housing sector has been in decline for 2 years now. Remember how I noted that initial legs down in bear markets usually last about 2- 2 1/2 years. With all the rotten news in the real estate and financial markets these two sectors are moving up strong not sinking. This is how major bottoms are put in when the market can't go down anymore even on bad news. I think these two sectors bear close watching in the coming weeks.

BTW if you had been brave enough to take GS the other day when I pointed it out you would now be up over 7% in three days. 2% better than you could do in treasuries all year.