The Case Shiller Index Misses

Today the Case Shiller Index was one of the important economic releases and it missed expectations by a fairly wide margin showing us that the housing recovery simply isn't there, in fact we are in the midst of a double dip recession in housing over the last 4 months-at least in 18 of 20 markets.


I recently talked about the mortgage and refinancing application data showing an extreme slowdown and posted comments emailed to me by one of our members who is a residential loan officer who said in his area, the data was worse then suggested:


"By the way, I would say the mortgage applications are down way more than they are letting on.  I have taken maybe two decent applications in the last month, compared to 10-15 a month up til the end of October.  Volume has dropped off a cliff with the rise in rates.  More bad news for the housing industry; as rates rise the payment goes up, which drops the amount a potential buyer can qualify for.  As a result, home prices will need to come down to a level of the buyers. In addition, keep in mind that this dramatic drop in refinance activity to nearly zero will also affect the early prepayment of MBS loans on the Fed's balance sheet.  It is this prepayment of MBS loans that the Fed is using to fund the POMO program.  Where is the money going to come from to continue the program through next year, more printing?"

So I remain bearish on Residential, which has seen a recent bounce. Lets take a quick look at one of my favorite ways to play the decline in the residential market...

SRS

 Here's the daily chart of SRS which has been in a very big, bullish descending wedge.  In November we saw a breakout from this pattern and lately a lateral trend which in this case i believe to be a zone of accumulation. You can see where the daily 3C chart posted positive divergences and in the white box, the area in which accumulation of SRS would occur.

 This 15 min 3C chart of SRS shows accumulation at the white arrows and distribution at the red arrow, you can see the red arrow led to a pullback in SRS. remember though that an equity under accumulation is usually accumulated as cheaply as possible and then sold into rising prices.

Looking at today's daily chart of SRS we see a "star" candlestick which in this configuration, (assuming it closes like this) is a potential upside reversal signal. Watch for the volume in SRS today, if it increase (and it's already near yesterday's closing levels), then it becomes even more likely that SRS has bottomed which makes for an excellent risk:reward entry. Just remember this is an ETF and there are certain drawbacks to an ETF, but for a swing up or a leg up, this is my favorite way to play residentials.