With soft housing data last week and higher interest rates expected, it is a good time to ask:

Is the housing rally over?

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Last Week Recap

The big economic news last week was the Fed policy decision and guidance. Friday’s announcement of the Amazon purchase of Whole Foods grabbed the headlines. Attorney General Sessions’ Senate Testimony got the gavel-to-gavel treatment.

Our question from last week – a possible change in market leadership – did attract some discussion. Friday’s grocery news is still being digested, but the sector shifts were pronounced.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. Despite the mid-week Fed announcement, the result for the week was barely changed.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

Note to Readers

Thanks to all of those who offered suggestions for changes in WTWA and feedback on my first attempt. I am still working on many of the other suggestions.

I am off next weekend, but I will again try to post an abbreviated version including an indicator update.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news last week was mixed.

The Good

  • Jobless claims declined to 237K, maintaining the current record-low levels.
  • Forward earnings estimates are holding up. This may seem like faint praise, but those criticizing the use of analyst estimates point to excessive optimism and repeated cuts in forecasts. Brian Gilmartin tracks these estimates. He notes the comparative strength, but also warns about possible weakness in tech.
  • Chemical activity barometer “suggests continued growth through 2017.” See GEI for the full story.
  • Small business optimism remains high. I have upgraded my attention to this series, since the importance has increased. Sluggish business investment, hiring, and loans to small companies have all been issues. Improved confidence from small business owners is helpful on all fronts. While some have (already?) become pessimistic on the Trump agenda, those relieved of regulations have been more positive. Calculated Risk provides analysis and this chart:

  • CPI remained benign with an increase of only 0.1% in the core rate. Some see this as bad news since it is below the Fed’s target and/or the take inflation as a signal of economic growth. Growth without inflation is good. It gives the Fed a little leeway.
  • FOMC decision got a positive reception. The small increase in the Fed Funds target was expected by markets, demonstrated by the small change in bond yields. Prof. James Hamilton (Econbrowser) explains why the “balance-sheet reduction is not scaring anyone”. He explains, and also provides some interesting data, importantly noting the effects of other news.

The Bad

  • Industrial production was unchanged. The decline from April’s 1.1% gain was expected, but disappointing nonetheless.
  • LA port data is a subject of some controversy. Calculated Risk sees a positive trend, using a 12-month rolling average. Steven Hansen (GEI) prefers rolling unadjusted three-month averages, but notes some anomalies this time. Data nerds should read both pieces in detail to understand how the methods chosen affect what you conclude.
  • Michigan Sentiment declined to 94.5 from a prior of 97.1.
  • Retail sales declined 0.3% compared to the April gain of 0.4% and expectations of unchanged.
  • Housing starts declined and missed expectations. Building permits did the same. On the surface this was bad news, but there is some debate over the data. See below for more discussion.

The Ugly

Collateral damage from the Amazon decision to purchase Whole Foods. While it was obviously bad news for competitors in the grocery business, the reach was much greater. Here is a heat map that I tweeted an hour after Friday’s opening.

There may be some logical extensions of the Amazon strategy, but the effect on only four other stocks exceed the entire size of the deal. In some cases, the declines came because of mutual ETF membership, not any specific analysis. This topic deserves more scrutiny.


Do you think that chocolate milk comes from brown cows? Does anyone? Mrs. OldProf, who grew up in Green Bay and graduated from Wisconsin, notes that most cows are at least partly brown. That would imply a lot of chocolate milk.

Somehow 16.4 million American adults (7%) hold this belief. These people vote and buy stocks. Check out John Harrington for the story and some other surprising examples.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a very light calendar. Housing data are most important, especially new home sales.

Fed speakers are out in force. Expect more color on the reduction of the Fed balance sheet.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

We have the combination of a light week for data, last week’s soft data on housing starts, the Fed rate decision, plenty of scheduled Fedspeak, and a calendar featuring home sales. The ingredients suggest a lot of attention to the housing market. People will be asking:

Is the housing rally over?

Here is a range of opinion.

  • The weakening market is a very bad sign. New Deal Democrat analyzes the turn down in permits, starts, and completions. Check out the post for the full story. He promises more to come.
  • Gains in homebuilder stocks and builder sentiment provide a better indication. (Scott Grannis).

  • Housing starts to remain in the expected range of 3 – 7% growth, year-over-year. Multi-family is solid, but the increasing trend is over. Single family starts are taking over. (Calculated Risk).

  • The monthly data present a misleading picture. Steven Hansen (GEI) explains how to interpret the difference between permits and completions.

As usual, I’ll have more in my Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


The Featured Sources:


Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Georg Vrba: Business cycle indicator and market timing tools.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

We should expect a raft of forecasts from newly-minted recession experts. This example takes the good record of the inverted yield curve and extrapolates from small recent moves. Part of the extrapolation is from some dubious “technical analysis.”

The yield curve is part of our recession forecasts. The influence

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