Playing Dead Cat Bounce

Posted: Dec 21, 2011 12:01 AM

It’s the end of the year, and of course, the dead cat bounce (oops, I should say Santa Claus rally) needs something to pin its stocking on. 

So, why not housing? 

I feel very comfortable in my analysis of this sector because, since 2006, I have studied, written, commented in depth, and even predicted collapse of the housing market.  In 2006, I was vilified for my opinion from coast to coast, as everyone from Ara Hovnanian to Ben Bernanke said housing was only experiencing a brief hiccup. 

They went on to say that by spring of 2007, the bull market in housing would be back with a vengeance.  Housing icon Bob Toll even said it was like “fairies dancing on the head of a pin,” whatever that means. 

However, not only did I predict the housing sector collapse, I took action for the benefit of my clients.  Not on a scale of billions, like John Paulson, but certainly in millions, as my portfolios were short homebuilders, short mortgage companies, and short financial institutions. 

With patience, 2007 turned out to be Christmas everyday. 

Since then, each time a positive building permit report is released, or a new or used home sale statistic is published, or a blip in homebuilder confidence is reported, the media immediately announces the rebirth of housing. 

In most instances, it is met with an immediate upward surge in stock markets, both domestically and internationally.  After all, housing is one of the cornerstones for everything good and bad with the world’s economy. 

Unfortunately, if you examine the math, a 10% increase in sales, building permits, or even positive attitudes, is based upon a historically low level. 

In fact, it should give you paws (dead cat!) to reconsider. 

For example, if the numbers moved from 10% to 11%, it’s “Hurray, a 10% increase!  Or, from 5% to 6%, a 20% increase.  Finally, from 1% to 2%, a 100% increase.  Just keep in mind, the lower we go and the worse the housing market becomes followed by a larger percentage uptick, more and more people will develop an increased sense of hope in the housing turnaround. 

That’s very misguided, to say the least.  Understanding both the math and the actual housing sector situation itself dictates these dramatic stock market responses are, in fact, merely dead cat bounces.  These are great opportunities to move to cash if you haven’t done so already, or even get short. 

It’s all very clear to me.  It’s the dancing on the head of the pin that I’m still really confused about.  

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