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Housing and the Stock Market

I first reported publicly on October 28, 2005 that the housing market was at risk of having completed a long-term cyclical top. At that time I posted a couple of housing indexes, gave the key levels to watch and said that any such break would be a major indication that the housing market had indeed topped. This break did in fact occur with the decline into the following intermediate-term cycle low and in doing so THE suspected housing top was confirmed. The stock market top followed in October 2007 and the big commodity top followed in July 2008. From these tops everything moved down into the late 2008 to early 2009 timeframe in conjunction with the deflationary forces of the Phase I decline. The lows seen then were not THE bottom, but rather a bottom from which the counter-trend moves separating Phase I from Phase II of a much longer-term secular bear market began.

Given the structural developments seen of late in the housing sector I want to address this topic here once again. In the first chart below we have the Dow Jones Home Construction Index. I have marked each of the intermediate-term cycle lows going back to 2001 with an "I". Now, I want to review something here to make a point. With cyclical analysis the direction of the trend is defined as the direction of the cycle of the next higher degree. That said, note how each of the advances up out of the intermediate-term cycle lows in 2001through early 2005 all moved above their previous intermediate-term cycle top and all of the intermediate-term cycle lows held above their previous intermediate-term cycle low. This is a cyclical trait known as right-translation. A right-translated cycle not only has a pattern of higher highs and higher lows, but it also advances longer in duration than it declines into the next low once the cycle rolls over. Once a cycle moves up beyond the mid-point of its average duration it is considered right-translated, which is typically bullish as was indeed the case into early 2005. Now, note that the final advance up into the July 2005 high was only 3 months in duration from the April intermediate-term cycle low, which made that cyclical advance left-translated, which was bearish. This was the first major clue that housing had peaked. Following this, there was a failed rally that peaked in January 2006, which left the cyclical structure of this index in peril because it failed to move above the previous high and was followed by the decline into the July 2006 intermediate-term cycle low, which as you see, moved below the previous intermediate-term cycle low. The point I want to stress here is the significance between bullish right-translated cycles as opposed to the bearish left translated cycles. Look at what followed. Once the intermediate-term cycles shifted to a left-translated structure, the longer-term trend in housing rolled over.

DJ Home Construction

Now, moving on to the July 2006 intermediate-term cycle low, price moved up into the early February 2007 peak, but having followed a left-translated cycle and after having failed to better the previous peak, this cycle was also set up with a left-translated structure, which was followed by still lower prices into the November 2007 intermediate-term low. From that cyclical low a bounce occurred, but again it transpired in a left-translated manner and failed to move above its previous high. As a result, more weakness followed into the November 2008 low, which also proved to mark a higher degree low as well. From that low, this index managed to move up into September 2009, which made this intermediate-term cycle right-translated, which served to confirm that a higher level low had indeed occurred at the November 2008 low. As a result of this right-translated structure, the decline that followed into the next intermediate-term cycle low in December 2009 held above the previous low, just as would be expected with a right-translated cycle.

But, from the December 2009 low, look what happened. While the advance into the next intermediate-term cycle top in April 2010 was able to better the intermediate-term cycle top, it still had a left-translated structure in that it peaked in only 4 months and look what followed. The decline into the November 2010 intermediate-term low violated the previous intermediate-term cycle low, exactly as would be anticipated following this left-translated setup. Moving on to the next cycle, it peaked in only 2 months and then flat lined, but because of the left-translated structure it too, was followed by a break below the previous intermediate-term cycle low as this cycle bottomed in October 2011. Thus far, the advance out of this last low has not been able to better the last intermediate-term cycle top. If this cycle begins to rollover, prior to the bettering of the previous top, then we will again have a failed cyclical advance and based on the current evidence, this cycle would also be left-translated, which will again set this index up for even lower prices.

The point to this exercise is to show you that we now have structural evidence that once again is suggestive that the higher degree counter trend bounce, which turned up at the 2008 low, is now at a critical point. If the advance out of the October 2011 low proves to be another failed advance and/or if it proves to have a left-translated structure, then once again this sector will be poised to be followed by lower prices. By the same token, if this rally can continue, then it may be a sign that things will rock along a little while longer before the next shoe drops. But, given the maturity of the overall longer-term cyclical advances that began at the 2008/2009 lows in commodities, housing and equities, this may well be a warning of the anticipated setup that is required in order to cap the counter-trend bounce separating Phase I from Phase II of the much longer-term secular bear market.

In the next chart below I have included the Housing Index. Without going through the chart step by step as we did above, you can see that this index is also very similarly structured. Here too, if this index fails to better the previous intermediate-term cycle top and or if it peaks with a left-translated structure, then this too will be a clue of what likely lies ahead in association with the Phase II decline. Ultimately, the structural key within the stock market itself is the setup surrounding the DNA Markers that have been seen at every major top since 1896.

HGX Housing Index


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