US housing market recovery likely to trigger massive stocks rally

Updated: 2013-01-05 06:43

By Puru Saxena(HK Edition)

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US housing market recovery likely to trigger massive stocks rally

United States policymakers have avoided the dreaded fiscal cliff. This development sparked a big advance on Wall Street. The majority of the world's stock markets also participated in the festivities and it appears as though the uptrend has further to run.

The Federal Reserve will provide approximately $2 trillion worth of "stimulus" over the next two years, and other central banks are also pursuing expansionary monetary policies. Under this scenario, global stocks and high yield bonds will probably continue to appreciate in value for several months.

Wall Street will continue to lead and a recovery in the US housing market may be the catalyst for a massive rally. If my assessment is correct, the ongoing housing recovery in the US will provide tremendous relief to Americans and unleash a surge in consumer spending. In turn, this will be positive for the world's largest economy and its stock market. In fact, I believe Wall Street is now in the final innings of its lengthy secular bear market and the next great bull market is around the corner.

In terms of the technical data, it is notable that the market's breadth is extremely strong and the NYSE Advance/Decline Line has climbed to a new high. Furthermore, new 52-week highs on the NYSE are significantly greater than the new 52-week lows. The Dow Jones US Financials Index has climbed to a multi-year high and this is bullish. According to our methodology, the stock market remains in a firm uptrend.

Turning to commodities, it is worth noting that none of them is at or near all-time highs. In fact, many grains are near 52-week lows; the energy complex is well below its all-time high and even precious metals are languishing. This weakness in commodities is consistent with my view that hard assets put in a major top in April 2011, and unless the global economy improves, this sector should be avoided.

Over in the precious metals patch, both gold and silver are struggling despite the ongoing global "stimulus" and this is a sign of weakness. Now, I am not suggesting that precious metals cannot appreciate in value, but investors should remember that this bull market is already 12 years old and the bulk of the gains may be behind us. At this stage, nobody knows whether gold and silver will take out their all-time highs. However, further improvement in America's housing market and a strengthening US dollar may end the precious metals party.

In the currency market, the US Dollar Index is still trading below the 200-day moving average; therefore, the world's reserve currency should be avoided for now. Elsewhere, the Japanese Yen is in a free-fall and now trading below the level seen in March 2012. Among the strong currencies, the Australian and Canadian currencies are holding steady and after a big spike, the euro is now consolidating its recent gains. As long as the US Dollar Index continues to trade below the 200-day moving average, I recommend exposure to these major currencies.

Finally, in the bond market, US Treasuries are weakening and yields have broken out to multi-month highs. As long as risky assets continue to advance, US Treasury securities are likely to remain in a downtrend. Elsewhere in the fixed income space, high yield corporate bonds have climbed to a new high and given the near-zero interest rates, they still look attractive.

The author is CEO of Puru Saxena Wealth Management (www.purusaxena.com). The views expressed here are entirely his own.

(HK Edition 01/05/2013 page2)