Expected/Normal Retracement Happening

Turkey-eating time is unfortunately (if you hate the turkeys species, i.e.) over... The holiday euphoria has perhaps given a bit of way to profit-taking, but this sort of normal retracement/reaction was to be expected, as I mentioned just before Thanksgiving. Whenever the market takes out (quite easily I must say!) a significant overhead resistance level such as 1,245 (which, until November, was actually the yearly high for the SPX index), we shouldn't be too surprised to see a re-test of that level at some point over the next few trading days. That action would only serve to confirm the bulls' resolve to hang on to their hard-earned gains. Hence, I remain bullish over the next few months as the SPX establishes a nice base in the 1,245-1,235 area for what may be its final bull-market extension (toward the low 1,300s) higher.

What is of great concern however, longer-term, is that the U.S. housing market gives off some serious signs of overextension. Unsold homes reached an 18-month high today, and judging from housing affordability data -- the ratio of the median U.S. home price to the medium disposable income (apparently hitting a cyclical high), -- there is no way but down for house prices. I am not saying that the market is going to crash or anything, but some softness (5-10% down) is to be expected next year. This is probably going to be enough to shave off a decent percentage of home mortgage refinancings (which have been a signficant source of U.S. consumer spending power), and thus contribute to the slowing of U.S. consumer spending and confidence, going forward. Mind you, this is not the "worst" case scenario -- we have already seen similar circumstances develop in the U.K. and Australia. What is more troubling though is the apparent blissful ignorance of the average U.S. consumer as to what the consequences of all this may turn out to be. The level of average consumer indebtedness is only sustained by the relatively strong job market. If that gives way, and it may well do, then all hell might break loose. Merck and GM, which have been eliminating jobs left and right, may well be precursors of what lies in wait. The situation may well be more serious than investors think -- the ongoing structural economic shift in the U.S. -- from a manufacturing to a service economy -- is going to leave the average U.S. consumer standing on very thin ice, when it comes to affordability of basic things. Retailers may slash prices all they want (and they have!), but I am detecting a false sense of trust when it comes to the way companies view the U.S. consumer. The latter has indeed been remarkably resilient so far, but then again, the house market and job growth have been quite perky as well so far. This is hardly going to be the case forever. Tread carefully, caution is needed.