Uncertainty Makes Cash King

08/12/2010 1:00 pm EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, is still 100% in cash because of continued weakness in employment and housing and a stock market that’s going nowhere.

In June, we [stated]: “Uncertainty is the best descriptor of the immediate future.”

On July 21st, none other than Federal Reserve Chairman Ben Bernanke further clarified our statement by adding the adverb “unusually” to the word “uncertain” to describe the world’s largest economy.

The stock market seems to be alternating between hope and reality. Every upbeat reading on an economic indicator provides hope that the economy is rebounding and a corresponding “up” move in the market [is at hand]. A curveball is tossed and reality dashes hope for a return to the good old days, and the market falls.

In just over seven months from January 1st, the Standard & Poor’s 500 has seen a closing high of 1217, a low of 1022, and has barely moved. It has gained 12 points while traversing 195 points from high to low.

With our models in negative territory, we remain in money market funds.

In his testimony to Congress, [Bernanke said]:

“Án important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job prospects. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.”

In a recent speech, [he] reiterated that the economy is expanding at a moderate pace, but that the housing market continues to [dampen] the recovery. Data on impending home sales released by National Associates of Realtors [last week] backs up this view.

Despite mortgage rates at the lowest level on record, the housing market continues to contract. The index of pending home sales fell 2.6% to 75.7 in June from an upwardly revised 77.7 in May. The 75.7 represents the lowest dating back to the index’s inception in 2001. It has declined 18.6% from a year ago, when it was at 93.0 in June 2009 and has fallen more than 40% from its peak in April 2005.

Most analysts agree that a turnaround in the housing market might be slow in coming. The federal tax credit of $8,000, which has helped to fuel sales, expired on April 30th.

Also, inventory continues to rise. The number of unsold homes on the market has risen to nearly four million, about a nine-month supply at the current sales pace. The normal rate for a healthy housing environment is about a six-month supply. With millions of foreclosed homes still slated for sale, sales are not expected to improve soon.

Even extraordinarily low mortgage rates have done little to ignite the housing market. Mortgage rates have dropped to their lowest levels since Freddie Mac began tracking rates in 1971.

Despite one of the most attractive periods to purchase a home in a lifetime, sales have stalled. The mix of high unemployment, tepid job growth, and tighter lending standards has forced many potential buyers to defer purchasing a home.

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