Over my thirty plus years in this business, I’ve become an staunch believer in the visual and actionable information offered by price charts. When I combine them with deep dives into companies and the actions of management teams, I’m able to make better investment decisions. If truth be told, when I face a tough Buy/Sell decision, price charts are my go-to tie breaker.

Cutting Through the Clutter

The stock market is a fickle place and its ability to adjust during complex times is often spectacular. For example, the financial media headlines are blaring with news about the Federal Reserve raising interest rates at its upcoming December 13-14 FOMC meeting. The consensus is for a 0.5 point increase in the Fed Funds rate with more talk about keeping rates higher for a longer period of time than expected.

Even worse, every time a Federal Reserve official speaks, the market turns on every word. Perhaps the most frustrating aspect of the whole thing is that as the volatility rises during these speeches, a perfectly profitable day can turn into one which delivers often painful paper losses.

Accordingly, it’s in these tough situations where price charts are the most useful.

A Picture is Indeed Worth a Thousand Words

The stock market, may certainly be ahead of itself, but it has at least factored in some sort of Fed pause over the next three months or so. This, of course, is the primary reason for the recent rally, which may be close to running out of gas, although the months of November and December are seasonally bullish.

I’m not sure what the Fed will do. And I’m equally unsure about what the stock market will do in response to the Fed beyond the historically traditional volatility for a short period of time before and after the Fed’s meeting, its rate announcement, and the usually uncomfortable press conference that follows where Fed Chair Powell usually drives a stake through the heart of any bullish expectations.

On the other hand, the action in the stock market, as quantified by price charts, is often more reliable that what the media reports, which is why I often note: “Price Charts Don’t Lie.”

The reasoning behind those words is self-explanatory. You can lie or omit key data and meaningful counter arguments in stories about the market. You can spoof price action with trading algorithms. And allegedly, you can make billions of dollars in Bitcoin disappear via a crypto exchange with unknown motives and equally obtuse operating procedures without any real consequences.

But you can’t fake a price tick on a chart! Indeed, the more complex the market, the more useful price charts become.

Mortgages and Homebuilders

Here’s what I mean. As the media talks up the bearish case for the Fed’s rate hikes, in the real markets, especially the bond market, where trillions exchange hands on a weekly basis, the action has turned bullish over the last few weeks.

Of course, a bullish bond trader is akin to a vampire who has just discovered easy prey. That’s because bonds hate inflation and love recessions. So, when treasure bond yields fall, it’s often a signal that the economy is about to slow.

Certainly, there is a flurry of recent data out there which suggests the economy is slowing. The most recent Chicago Purchasing Manager’s Index (PMI) clocked in at a scary 37 (13 points below the 50 midpoint), a number which if matched by other data, such as perhaps a contraction in the monthly employment report would signal worsening economic conditions.

It’s also important to note that while bond trading was once an exclusive Wall Street club, everyday people, sometimes without realizing it, are reacting to the moves in the usually obscure bond market on a regular basis now.

In fact, the smart homebuyer is coming back into the market as mortgages dip below 7%.

That’s because the U.S. Ten Year Note yield (TNX) is the benchmark for most mortgages. And the recent rolling over of TNX, in response to bond trader expectations of a slowing economy, has led to a commensurate rolling over in mortgage rates, such as the 30 year mortgage (MORTGAGE30YR).

So, how meaningful is this dip in mortgages? By the looks of the price chart, it’s more than just a blip. And here’s why:

• Rates were well above the upper standard deviation band (upper green band) for months, meaning the market had gone well above normal expectations and price behavior;
• This band is built on the 200-day moving average, a long term smoothing of the price trend;
• When prices move back inside the band as they recently did, it signals that the price trend is about to reverse to the mean, which is currently just above 6%.

Now, it’s important to note that if rates do fall back to the mean, they may consolidate and rise again, or fall below the mean and eventually head toward the lower band, which is currently near 5.3%.

Nevertheless, the current move back inside the upper band is significant.

Homebuilders Confirm

The daily news about the housing market is grim. Yet, there have been steady gains in the homebuilder stocks over the last couple of months which have coincided with the action in the bond and mortgage markets. On the ground, realtors are reporting some improvement in interest from buyers as well.

According to The Real Deal.com, a real estate news service, in the article linked above, realtors are reporting “confidence in the market and there’s just signs that things are getting better. And that’s when people start to flood the market.” Interestingly, the article added: “Agents say the roller-coaster that mortgage rates have been on for the past year has created a more savvy client base, one that knows when to enter the market and when to hold off.”

In other words, because everyone is plugged into the news cycle now, as I’ve noted multiple times, the markets now drive the economy. This is what I call the MELA system, a central cog in my analytical tool chest.

In the case of housing, we are also in a long term sweet spot where supply rules the roost. That’s because, supplies of good homes remain tight and markets with tight supplies will usually respond to improved conditions more rapidly than those where supply overwhelms demand.

SPHB

The stock market is confirming the potentially bullish reversal in mortgage rates as money is steadily moving into homebuilder stocks, as in the S & P Homebuilding Subindustry Index (SPHB), which is well off its 2022 bottom and has the potential to move steadily higher.

You can see the bullish correlation of the price action in SPHB as it responds to the rolling over of TNX, and the subsequent moving lower of mortgage rates.

Price Charts Don’t Lie

The media keeps telling investors that the housing market is crashing. That’s an assessment that is only partially true based on multiple factors such as extraordinary price comparisons based on a market that got out of control late 2021 and early 2022. In addition, National Association of Realtors data shows that there are regional differences with the West and East Coast doing much worse than the Midwest and the South in regard to existing home sales.

New home sales are also off of their 2021 highs, yet builders continue to deliver profits close to or above Wall Street estimates due to their ability to collect fairly good premiums on new builds due to low supplies of homes.

Of course, if a full recession does develop, the homebuilders are not likely to be spared.

Yet, even as the media focuses on old news, the price charts in this article offer a real time assessment of where things actually stand. And at the moment, they suggest that at the very least we have seen an intermediate term respite in both mortgage rates and the prospects for homebuilders.

Arguably, when you read a negative, or overly positive story about investments, it makes sense to see what the price charts are saying. And if the charts disagree with the story, I’ve found that more often than not, the charts are right.

If the Fed does kill the rally in the stock market, you can bet that a price chart will give you an actionable picture of where things stand at the moment in bonds, mortgages, homebuilder stocks, and more often than not, in just about everything else that’s related to investments.

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