The Heads up for a Pre X-mas Correction
Now I know I’ve been stating the market has been (and is) over extended for a few weeks now, but today i noticed just another reason why the markets may correct.
The VIX saw a nice jump off its low.
Make no mistake, I am still bullish on the American economy… with the exception of housing. Although housing stocks have rallied as of late, I do not believe their rally is justified. I think the idea in the housing stocks play is that the Fed may start lowering rates sparking another bullish housing market (albeit more subdued than the past 4 years).
Another reason as to why I think it is a mistake is because I do not think interest rates will go down. The Productivity numbers are due on 12/05/06 and given the last number and the housing sector I do not think this number will be relatively good. I think it may be good enough to justify no rate increases, but will not be good enough to justify a rate decrease. Remember Productivity has a far greater effect on inflation than Energy and Food costs, so if the Feds see something they do not like w/in Productivity, rates may rise.
If interest rates do not go down, the housing sector will take some time to correct itself and unload the massive build in inventory. The productivity number may cause a renewed inflation threat in the US Economy, hence a market correction. (At most until next earnings season, when earnings will gain focus again.)
On a side note: watch out for the SEMIS. The capacity has delined and this may give rise to slow down the 1st Q or 1st half of 2007.
