Five Years from the Bottom: Keep an Eye on Housing and Banks

NEW YORK (TheStreet) -- The first cracks in the housing bubble began with the peak in housing-related stocks in mid-2005. The home price bubble popped in mid-2006. Early signs of the Great Recession began when community bank stocks peaked in December 2006. The larger regional banks peaked in February 2007.

My market call was that you cannot sustain a bull market for stocks with a bear market in bank stocks.

The major averages succumbed into bear markets with a market top for the Russell 2000 in July 2007, followed the Dow Industrials and S&P 500 in Oct. 2007, the Nasdaq in Nov. 2007 and finally Dow Transports in May 2008. The bear market was underway and the Great Recession began at the end of 2007.

All eight of the indices in today's 'Crunching the Numbers' table set bottoms five years ago today with the S&P 500 fractionally above the devilish '666' on March 9, 2009.

In May 2005 I wrote an article on RealMoney warning that homebuilder stocks were vulnerable. This can be tracked looking at the weekly chart of the PHLX Housing Sector Index (209.22) below.

Courtesy of MetaStock Xenith

Looking at Monday's table and the above graph, the housing index peaked at 293.66 in July 2005 and the decline to its March 9, 2009 low was 81.5%. Failure to hold its 200-week simple moving average in June 2007 accelerated the downside.

Since March 9, 2009, this index did not have significant upside until it broke out above its 200-week in January 2012, and in September 2012 moved above its 38.2% Fibonacci Retracement at 145.55. The next upside targets became the 50% retracement at 173.80 then the 61.8% retracement at $202.05.

The housing index has a positive but overbought weekly chart setting a multiyear intraday high at 213.81 on Feb. 28 up an astonishing 293.7% from the March 2009 bottom. Even after this gain the index remains 27.2% below its July 2005 high.

With single-family housing starts below a 600,000 annual rate in January and with the February reading of the National Association of Home Builder Housing Market Index down a record 10 points to 46 sustaining gains in the housing sector should become challenging.

In early-2006 I began to study data from the Federal Deposit Insurance Corporation dissecting FDIC Quarterly Banking Profiles. It amazed me that so many community and regional banks were overexposed to C&D loans. In April 2006 I began to write stories on RealMoney warning that bank stocks were vulnerable.

Courtesy of MetaStock Xenith

The weekly graph above and Monday's table below shows that the America's Community Bankers Index peaked at 315.05 in December 2006. The decline to 108.55 in March 2009 totaled 65.5%. The first wave of a rebound stalled below its 38.2% Fibonacci Retracement at 187.59 in April 2010.

This index moved sideways until it broke out above the 38.2% retracement and its 200-week SMA in June 2012 and this rally continued to a multiyear intraday high at 243.38 on Friday, March 7 above the 61.8% retracement at 236.33. The rally since March 2009 has reached 124.4% leaving the community bank index 22.7% below its December 2006 high.

On July 2006 I wrote a RealMoney article warning that the top eight banks by assets were also vulnerable including the four that would gain the mantra of being "too big to fail." In this article I mentioned that the NAHB housing market index declined to 40, down from its peak of 72 set in June 2005. As we all know, it was the mortgage market tied to the housing bubble that hurt the bigger banking institutions.

Courtesy of MetaStock Xenith

As the graph above and the table below shows the KBW Banking Index peaked at 121.16 in February 2007 and when the 200-week SMA failed to hold in October 2007 the index and most equity indices began their bear markets. The banking index declined to 17.75 in March 2009 down 85.3%, the biggest loser in the table.

The rebound failed at its 38.2% Fibonacci Retracement at 57.21 in April 2010 then traded sideways until breaking out above the 200-week SMA in July 2012 and the index set its multiyear intraday high at 71.82 on March 7, up 304.6% from is March 2009 low. The banking index is above the 50% retracement at 69.37 but still below the 61.8% retracement at 81.54, and is 40.7% below its Feb. 2007 high.

The FDIC released its Quarterly Banking Profile for the fourth quarter of 2013 during the last week of February and it showed the U.S. banking system continued to make progress recovering from the Great Recession.

Total assets in the banking system rose 0.9% sequentially to $14.72 trillion and the share controlled by the biggest four banks fell slightly to 43.9% from 44.3%. The JPMorgan Chase (JPM) share fell to 14.1% from 14.54%, the Bank of America (BAC) share was shaved to 11% from 11.11% and the Citigroup (C) share declined slightly to 9.16% from 9.22%. The Wells Fargo (WFC) share rose to 9.66% from 9.46%.

The banking system reported net income of $40.3 billion for the quarter up 16.9% year over year but the improvement was mostly attributed to an $8.1 billion decline in loan-loss provisions. Reduced mortgage activity and declining trading profits, the bread and butter of the big banks has been a drag in recent quarters.

Bank of America ($17.33) is up 11.3% year-to-date and set a multiyear intraday high at $17.63 on March 6. The weekly chart is neutral with the stock above its five-week modified moving average at $16.60 but with a declining 12x3x3 weekly slow stochastic. This week's value level is $16.83 with monthly and quarterly risky levels at $17.74 and $18.48.

Citigroup ($49.62) is down 4.8% year-to-date after setting a multiyear intraday high at $55.28 on Jan. 9. The weekly chart is negative with the stock below its five-week MMA at $49.68 with a declining 12x3x3 weekly slow stochastic. This week's value level is $43.95 with a semiannual pivot at $48.06 and monthly risky level at $51.47.

JPMorgan ($59.40) is up 1.6% year-to-date and Friday's high was just 2 cents below the all-time intraday high at $59.82 set on January 16. The weekly chart is positive with the stock above its five-week MMA at $57.47. My monthly value level is $57.03 with a quarterly risky level at $63.43. The stock is above its May 2007 high at $53.25.

Wells Fargo ($47.95) is up 5.6% year-to-date and set an all-time intraday high at $48.48 on March 7. The weekly chart is positive with the stock above its five-week MMA at $46.09. Semiannual value levels are $42.32 and $40.96 with a monthly pivot at $46.77 and quarterly risky level at $49.48. The stock is above its spike high of $44.67 set in September 2008 which is when the regulators had that temporary ban on short sales.

Dow Industrials (16452.72) is down 0.7% year to date and is the only major average not to set a new all-time high in 2014 as its all-time intraday high was set at 16588.25 on Dec. 31. The decline from its October 2007 high at 14125 to its March 2009 low at 6470 totaled 54.2%. Dow Industrials rallied 156.4% to its Dec. 31 high, which is 17.4% above that Oct.2007 high. The weekly chart is positive with the five-week MMA at 16174. My annual value levels are 14835 and 13467 with a semiannual pivot at 16245 and monthly, quarterly and semiannual risky levels at 16644, 16761 and 16860.

S&P 500 (1878.0) is up just 1.6% year-to-date and set its latest all-time intraday high at 1883.57 on Friday, March 7. The decline from its Oct. 2007 high at 1576 to its March 2009 low at 666.8 totaled 57.7%. The S&P 500 rallied 182.5% to its latest high which is 19.5% above its Oct. 2007 high. The weekly chart is positive with the five-week MMA at 1835.1. Semiannual and annual value levels are 1764.4, 1339.1 and 1442.1 with quarterly and monthly risky levels at 1896.0 and 1930.7.

Nasdaq (4336) is up 3.8% year to date and set its latest multiyear intraday high at 4371.71 on March 6. The decline from its November 2007 high at 2861 to its March 2009 low at 1226 totaled 55.7%. The Nasdaq rallied 245.3% to its latest high, which is 52.8% above its Nov. 2007 high. The weekly chart is positive with the five-week MMA at 4219. Semiannual and annual value levels are 3930, 3920, 3471 and 3063 with a quarterly pivot at 4274 and monthly risky level at 4567.

Dow Transports (7592) is up 2.6% year to date and set its latest all-time intraday high at 7627.44 on Friday, March 7. The decline from its May 2008 high at 5537 to its March 2009 low at 2134 totaled 61.5%. The Transports rallied 257.4% to its latest high which is 37.8% above its May 2008 high. The weekly chart is positive with the five-week MMA at 7356. Semiannual, quarterly and annual value levels are 7245, 7086, 6249 and 5935 with a semiannual pivot at 7376 and monthly risky level at 7802.

Russell 2000 (1203.32) is up 3.4% year to date and set its latest all-time intraday high at 1212.82 on March 4. The decline from its July 2007 high at 856.48 to its March 2009 low at 342.59 totaled 60%. The Russell 2000 rallied 254.0% to its latest high which is 41.6% above its July 2007 high. The weekly chart is positive with the five-week MMA at 1162.39. Semiannual and annual value levels are 1133.29, 1130.70, 966.72 and 879.39 with a quarterly pivot at 1180.35 and monthly risky level at 1253.12.

Crunching the Numbers with Richard Suttmeier

Pre-Crash High / Date of Market High -- Before the Great Recession began these eight markets set significant highs during the months shown.

March 2009 Low / Percent of Crash -- All of these markets bottomed nearly simultaneously on March 9, 2009 five years ago, down between 54.2% and 85.3%.

Intraday Market Highs / Date of Highs -- The recent highs were set last week for six of eight markets with the housing index setting its high the week before. Only the Dow Industrial Average has yet to set a new high in 2014.

Percent of Rally -- The extent of the rallies have been mindboggling between 124.4% and 304.6%.

Percent of Old High -- Five of the eight are 17.4% to 52.8% higher than their 2007 / 2008 pre-crash highs. It's not surprising that the housing index, community bank index and KBW banking index are still below their 2005 / 2007 highs by 22.7% to 40.7%. This tells me that the damages are not totally healed.

Five-Week Modified Moving Average -- All are above their five-week MMAs.

200-Week Simple Moving Average -- All are well above their 200-week SMAs which represent the long term risk on a reversion to the mean over a rolling three to five years.

12x3x3 Weekly Slow Stochastic -- All have rising or overbought readings and in combination with weekly closes above the five-week MMAs the weekly chart profiles are positive.

Value Levels -- Represents the downside risks given markets weakness.

Pivots -- Are levels that have been magnets so far this month (M), quarter (Q), or this half year (S).

Risky Levels -- Represents the upside potential as long as the weekly charts remain positive.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff

Richard Suttmeier is the chief market strategist at ValuEngine.com.

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