I just had a look at this thread, and am surprised by the level of misunderstanding. This is David Rosenberg’s study and it shows a 79% correlation between the NAHB homebuilder sentiment index and the S&P500 one year later. If you think he’s full of it, then time will tell.
In the last decade, we have gone from making products to buying and selling houses to each other on money created by the Fed, and recycled to us from Saudi Arabia, Japan, China, etc. NOW HOUSING IS THE ECONOMY.
That is why Rosenberg showed only the last decade in the chart: Housing is more correlated with the economy than ever. Housing IS the economy.
My timing has been off, as the market retreat was delayed by delusional market participants. Just as in 2000, they are grossly mispricing equities.
Ciovacco Capital has the Rosenberg quote, followed by the conclusion that the correlation, if it holds, would lower the S&P500 by 42% from August 2006 – 2007.
“The chart above is rather intriguing – the NAHB homebuilders index leads the S&P 500 by 12 months and with a near-80% correlation – a correlation that over time has actually strengthened, owing to the growing influence that the real estate market has exerted on the overall economic and financial landscape over the past five years. In fact, we can trace almost two-percentage points of the 3 1/2% average annual rate in real GDP over that time frame to the boom in housing construction and home prices – the direct impact on homebuilding, the spin-offs to other sectors like real estate services, architecture, engineering, legal, etc and the multiplier impact from the ‘wealth effect’ on consumer spending, especially on home improvements and household furnishings.”
The statement above means that during the past five years housing has either directly or indirectly accounted for 57% of economic activity. The latest release of new home sales shows a 21% year-over-year decline.
Using the 12-month lag of the S&P 500 as shown in the chart above, the actual correlation between the S&P 500 and the homebuilders index is .79, which would give us the following calculation to forecast where the S&P 500 may be 12 months from now (roughly August 31, 2007):
* The homebuilders index had a reading of 67 in August of 2005 (12 months ago)
* The reading of the index as of August 2006 is 32
* A move from 67 to 32 represents a 52% decline
* With a .79 correlation to the S&P 500, we need to reduce that decline by 79%, which gives us roughly 41% (reduced from 52%)
* If the correlation holds, which it may not, the S&P 500 would be 41% lower 12 months from now (or roughly on August 31, 2007).