03/01/2006
So far, so good in 2006, right? Well, not quite.
The first two months of the year in the U.S. stock market have been an interesting study in the struggle between optimists and pessimists, and that often leaves pragmatists like me caught smack dab in the middle.
At the onset of the year I reasoned that there was a 60% chance that the market would run with the bulls, and a 40% chance that the market would be mauled by the bear. So far, both bull and bear have made their mark.
The major averages -- Dow Industrial, Nasdaq Composite and S&P 500 -- are all higher year-to-date, but most of those gains came early in the year, with a buying spree that lasted for the first two weeks of the year.
Since that early 2006 buying spree, the market has been on a roller coaster ride of sorts. There have been several 100-point down days on the Dow to go along with the several 100-point winning sessions. And while some sectors of the market continue to perform well, stocks that led the market higher early in the year -- namely big-cap tech stocks -- have really pulled back here at the end of February.
There's a lot of conflicting data out there right now about inflation, economic growth, consumer spending, industrial production, etc., and nobody seems to have a real clear picture on where things are headed. When this happens, you get that seesaw market that we've seen thus far in 2006.
So far this year the major averages are teetering on the brink of what we call Alert Mode. Alert Mode simply means that the averages are within 5% of generating a Sell Signal in the Successful Investing Plan. This is a big yellow caution flag for the market going forward, as it signals to us that the long-term outlook for stocks may be to the downside. Tuesday's big drop in the stock market is indicative of this kind of potential downtrend, and that means making money this year will be a challenge.
Don't get me wrong, I am not saying that the bears will win the battle of 2006, nor am I siding wholly with the pessimist camp. What I am saying is that as the year goes by and the strength in this market falters, the chances increase that the U.S. markets will have tough slogging in the weeks and months ahead.
Fortunately, there are still ways to make money in this market, and that is why we are continuing to recommend small- and mid-cap stocks. We've also just recently made a new allocation to a hot sector that has experienced a sharp pullback and is at very attractive levels right now.
To find out more about this new allocation, and to position your portfolio to profit regardless of market conditions, check out my Successful Investing service.
http://www.fabianssuccessfulinvesting.com/order.php?offer=12
The numbers are in, and what we've been saying would happen for some time now is undeniably here. The housing bubble is for real, and it is starting to show signs of bursting.
Check out some of the recent statistics on housing and you'll get a better sense of what's been happening:
Unsold new homes reached a record level last month, as sales slipped despite the warmest January in more than 100 years.
The Commerce Department reported Monday that sales of new single-family homes dropped by 5% to a seasonally adjusted annual rate of 1.23 million units last month. That was the slowest pace since January 2005, and the number of unsold homes is now at a record high of 528,000.
After climbing steadily for a decade, the nation's homeownership rate appears to have leveled off. New data released late last month by the U.S. Census Bureau put the homeownership rate at 69% in the fourth quarter of 2005, down from 69.2% a year earlier. It is the third quarter in a row that the rate hasn't posted a year-over-year gain.
The National Association of Realtors' Affordability Index now stands at 115.8, the lowest level since the third quarter of 1991. When the index stands at 100, a family earning the median income has just enough money to afford the median-priced home, assuming a 20% down payment and current interest rates. Forty-three percent of first-time homebuyers purchased a home with no money down.
According to the National Association of Realtors, existing-home sales are expected to decline 4.7% to 6.74 million this year, down from a record 7.07 million units in 2005. New-home sales are expected to fall 8.5% to 1.17 million from a record 1.28 million last year.
The trade group predicts housing starts, or the number of new homes built, will reach 1.87 million units this year, down 9.3% from the year earlier. The national median existing-home price for all housing types is expected to increase 5% this year to $219,200, while median new-home prices are projected to rise 5.7% to $250,900. That's about half the rate of home-price increases last year.
These statistics all add up to a frightening prospect for those relying on ever-increasing home values to provide them with the investment returns they are seeking. The numbers are also troubling for those who intend to rely on their homes to bail them out of any potential financial crisis.
We've been warning you for quite awhile now that home values will be coming down, and those risky exotic mortgages that so many home buyers have taken out in recent years will come back to bite them now that interest rates are on the rise and will presumably continue rising in the months ahead.
The bottom line is you need to be prepared for a correction in the housing market, and all of its ramifications. A slowing housing market and increasing interest rates mean less borrowing from the equity in homes, which has been a big driver of consumer spending over the past few years. The pullback in spending will undoubtedly be felt in nearly every segment of the economy, and this of course will have a big effect on stocks.
"Man's proper stature is not one of mediocrity, failure, frustration, or defeat, but one of achievement, strength, and nobility. In short, man can and ought to be a hero."
—Mike Mentzer, Mr. Universe
If you are tired of mediocrity, failure and frustration with your financial life, take the necessary action to make heroic decisions for your future.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.