Taper on, taper off, only way is up

Last night’s market action was as confused as the Australian Treasury with moves all over the place. The data flow was minimal but what there was was not great. From Calculated Risk, the NAHB Builders Index was weak:

Builder confidence in the market for newly built, single-family homes was unchanged in November from a downwardly revised level of 54 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. This means that for the sixth consecutive month, more builders have viewed market conditions as good than poor.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the November release for the HMI and the August data for starts (September and October housing starts will be released in early December). This was below the consensus estimate of a reading of 55.

This chart shows that confidence and single family starts generally move in the same direction, but it doesn’t tell us anything about the expected level of single family starts.

Probably a better comparison is to look at the year-over-year change in each series (Builder confidence and single family housing starts).Once again the year-over-year change tends to move in the same direction, but builder confidence has larger swings (especially lately).

Hardly decisive but the S&P hit a new high anyway above 1800 for the first time before falling back marginally on the night. And long bonds rallied, coming in 1% on yields. The US dollar weakened a bit, but gold did a bit more, and the Aussie rose but is coming off this morning. Bitcoin explored some new area of outer space. Like I said, all over the place.

With more record highs and round numbers, Of Two Minds has a useful post:

Gee, we’re all on one side of the boat now–long the S&P 500, NASDAQ, Dow, Eurozone stocks, the Nikkei, not to mention rental housing, junk bonds, bat quano, ‘roo belly futures and the quatloo–basically every “risk-on” trade on the planet–is that a problem?

The conventional (and convenient) answer is “nah–stocks can only rise from here.” So what if market bears have fallen to 15% or less? So what if 85% of investors are on the same side of the boat? You’d be nuts to leave the winning side, the trend-is-your-friend side, the “don’t fight the Fed” side, the side with all the “smart money.

“It may appear to be safe for everyone to be on the same side of the boat, but the gunwale is awfully close to the water. With the sea remarkably calm (i.e. no waves of turbulence or volatility), the fact that the boat is overloaded doesn’t seem dangerous.But once the sea rises even a bit and water starts lapping over the gunwale, the “guaranteed safety” of the bullish trade might start looking questionable.When the boat takes on water quicker than anyone believes possible and capsizes, it will be “every punter for himself.” But few longside punters are wearing lifejackets.

This is all Investing 101: be wary of extremes of euphoria and confidence and being on the same side of the trade as everyone else. Yet everyone continues adding to their long positions without adding portfolio protection (puts, etc.):

Three indicators suggest this move will reverse shortly, either in a “healthy correction” or a reversal of trend–which one cannot be determined until the downturn is underway.

The rapid rise of the market has traced out a bearish rising wedge. This pattern usually leads to some sort of correction. The MACD histogram is divergent, dropping to the neutral line as the SPX has soared ever higher. Lastly, price has pulled away from both the 50-day and 200-day Moving Averages, suggesting the rubber band is remarkably stretched.

With Larry Summers and Paul Krugman telling us we can’t grow without bubbles, and Janet Yellen grabbing the tiller, what could possibly go wrong?