Wednesday market update

The stock market seemed to like the news coming from the housing sector, which showed a huge surge in housing starts today. In fact, housing starts jumped 22.2% in February, which is the largest since the early 1990’s.

What is interesting about this number is almost all of the gain (82.3%) was supported by a surge in multifamily construction. This is construction in apartments, duplexes and condos to meet the growing need for people who need to rent.

Single family homebuilding rose a modest 1.1% nationwide. However, in the West housing starts are still falling sharply. There is still too much supply (10 months) and this has to be narrowed before we can expect existing home prices to recover.

In other news, the Producer Price Index remained barely above zero at 0.1 for the top line number. The stability in the crude oil prices since December and the subsequent advance in oil prices to near $50 are evidence to some that deflation is becoming less of a threat.

I don’t happen to buy that argument, especially with the money supply continuing to fall. M2 dropped again this last week down from 9.7% to 8.1%. Inflation comes about when the money supply is rising rapidly, not falling but there are a lot of issues here that are not transparent and geopolitical trade wars relative to our currencies that make this a challenge.

For now, it appears that seasonality factors and all of the talk of the stimulus package have speculators buying energy again. But the economy is not the same as it was in 2007. There is a lot of technical resistance at the $50 level, so this sector is due for a pullback with intermediate-term cycles at %K 99 and %D at 98.

Let’s talk about the stock market and this six day rally. How many of these spike rallies on low volume have we seen over the last 18 months?

In a healthy market, a rally sees volume increase. In a bear market trap, volume decreases and this is exactly what we have seen over the last few days. This isn’t broad based buying.

Also we are starting to see a wedge formation developing---higher highs but lower lows in the daily ranges, which is typical market behavior as we approach short term resistance in overbought conditions.

Notice, that the daily stochastics are now at %K 97 and %D at 85 for the Russell 2000. We are also approaching the 50-day moving averages.

You can see from this chart the overhanging resistance that stocks face under the 50-day moving averages.

Low volume wedges into resistance/and or moving averages invites another bear attack as long as prices keep taking out critical support levels as happened by breaking the November lows. The bears are still in charge.

I do want to make note that pessimism reached extreme conditions a couple of weeks ago and this is why we have seen such a powerful rebound. The short sellers take profits, but these same short sellers are also looking to retake new positions at key resistance levels.

Technically, the market needs to set up a higher low, so the probabilities favor a need to retest and prove last week’s lows.

In the meantime, the technical underpinnings remain poor.