Bears won a small battle today, but the war over market direction still rages. Given that the selling began just after 10:00, one could easily blame the weakness on the slump in existing homes reported at that hour. The National Association of Realtors report showed an annualized sales pace about 5% slower than that of June, along with a 7.3-month supply of homes on the market... the highest level since 1993. In absolute terms, the number of existing homes for sale rose 40% from a year ago. Despite the growing supply glut, the median sales price recorded for July was flat against last July.
On the other hand, today's market behavior did not constitute the type of torrid action that typically signifies a close tie with news. Equities were more likely working off a near-term overbought status, and bulls, no doubt, consider today's action to be nothing more than a consolidation of recent gains, pointing to the strength in the last hour of trading as evidence. I remain skeptical, as well, since it would seem more appropriate for the next downswing too take as many people as possible by surprise. In other words, I don't think we will simply ease into it.
So, with an overwhelming body of evidence pointing to a housing blowup, when will it matter to the broader equity market? My guess is that when year-over-year median price comparisons start to go upside down, psychology will shift hard. That is not to say that stocks won't go down beforehand. Many other factors could start to matter first, such as bonds, a weak dollar, or inflation fears.
In the meantime, the sectors that are directly related to housing continue to take it on the chin. The homebuilders sank about 3%, with big losses seen in KB Home... which was downgraded by J.P. Morgan... and Toll Brothers... which lowered its 2006 earnings forecast for the third time yesterday. Lowe's, which was already under two days of pressure after blaming its earnings weakness on the soft housing situation, coughed up another 3% today. New Century Financial, one of the riskier mortgage lenders, also saw its shares 3% lower.
The only other sectors catching my eyes were oil-related. The price of black stuff fell about 2%, sparking a sell-off in several oil services companies on my screen, such as Encore Acquisition and Conoco Philips. I've been asked a lot recently about the bearish technical formations in the charts of oil and oil stocks. I agree they look bearish, but no, I'm not shorting them. I'm too chicken to put myself in front of the geopolitical risk that comes with that side of the trade. Likewise, I respect the bearish indicators, and so continue to stand aside waiting for an attractive point to buy energy again. I don't expect to see it any time soon.