The Worst is Over

At the top of this post is an image of the cover of the latest issue of Time Magazine. The chart below the Time cover is a monthly chart of the housing stock index quoted on the Philadelphia stock exchange.

The historical low of the index was reached in March 2009, coincident with the low in the S&P 500. While the S&P 500 is currently trading about 30% below its all time high, the housing index stands 70% below its all time high and much closer to its all time low than the S&P.

The Time cover together with the fact that the housing index is still near the low of its historical range suggests to me that the worst is over for housing stocks. I doubt we shall see a return to all time highs in the index any time soon, but neither do I think the 2009 low will be taken out.

The important point here is that if the housing market in the U.S. can stabilize and recover, then the entire economy will get an extra upward push. This in turn will help lift the gloom that seems to have engulfed the the U.S.A. As the dark clouds begin to disperse the stock market will rally. I still think the S&P 500 is headed for 1300 and above over the next nine months.

Investors Flee Stock Market

At the top of this post you will find an image of Sunday's front page of The New York Times. I did a double take when I saw the headline: "In a striking shift investors flee stock market".

Underneath the front page image I have posted a chart showing monthly inflows and outflows to and from U.S. stock market (red bars) and bond market (gray bars) mutual funds.

Two things stand out on this chart.

First, money is flowing out of stock market mutual funds - a very unusual development. On a monthly basis it looks to me that outflows during the past three months have been greater than for any three month period since the March 2009 low. This is not surprising since the April-July drop in 2010 was twice as big as any other drop since March 2009.

Of course we already know that there is widespread bearish sentiment about the U.S. stock market. This information and the Times headline just confirms this judgment. It gives me confidence that the next big move in stocks from here will be upward.

Second, there has been an enormous inflow of money to bond funds. Since bond yields are at or near their historical low points I take this as a sign that an enormous bullish crowd (on bond prices, not yields!) has built up. I think this bond market crowd is similar to the stock market crowd that existed near the 2000 top in the stock market's internet boom. And I also think that we are very near the point where this bond market crowd will begin to disintegrate, thus sending yields higher and prices lower. I don't think we shall see U.S. bond yields this low again in our lifetimes.

Wheat

Friday morning my attention was caught by the headline you see above in the image of the front page of the New York Times: "Russia, crippled by drought, bans export of grain". On the surface this would seem to be bullish news for wheat prices. But notice how wheat traded on Friday on the Chicago Board of Trade - the market broke nearly 60 cents from its high of 815 the previous day. Someone took advantage of the buying this headline encouraged to sell a lot of wheat!

The real question from the contrarian trader's point of view is whether or not a big bullish crowd in wheat has developed. My answer to this question is no. Why? Take a look at the weekly wheat chart above this post. You can see that wheat is trading at roughly the midpoint of its historical range. Moreover, the recent wheat bull market has lasted only about 8 weeks, barely enough time to attract the public's attention.

So I think this headline marks only a temporary top in wheat. I see support in the 675-700 range and think the market is likely to move higher from there.