Holy Moley! Just look at those real estate prices! It seems that, if we aren’t there yet, the moment of panic buying could well be around the corner.

If you’re a smart person (and nearly all of our clients are) you might already be asking; ‘Is this a bubble?’ And, even if it is you might wonder further into ‘Is there some way to benefit from it while it lasts?’ Seems to me that this is a subject that needs some attention so let’s review what we know… and also what we think.

First, let’s look at things that are driving the housing market. The obvious culprit is supply, which, simply put, is nowhere near demand — for both new and existing homes: demographic trends which had been benign for homebuilders have shifted as millennials are no longer delaying the formation of households. Low mortgage rates and a heightened appreciation for home ownership are also playing their roles on the demand side. However, the other side of the coin reveals some harsh realities: building sites are in short supply, the cost of materials is high (and going higher) and there’s a shortage of skilled labor to build those houses. On the supply side, there’s trouble in River City, and just about everywhere else. That does not mean there is no hay to be made. It’s just going to be expensive hay. Indeed, homebuilders are actually faring pretty well:

From Forbes Magazine: CFRA Research equity analyst Kenneth Leon wrote in a research report this week, “We think homebuilders are at an advantage to raise prices given the all-time low of U.S. existing home inventory as well as the large demand of millennials who are financially able to own a home with low rates and savings built up. Most homebuilders have an order backlog that can produce solid home deliveries in 2021.”

We could add that the momentum may well continue at least into next year.

So then, if homebuilders are doing well, and retailers such as Home Depot, Walmart, Lowes, Target, etc. are benefiting from the knock-on effect of filling home buyer’s needs for all sorts of house-related things to buy and homeowners are sitting pretty with vast equity gains in their homes…what’s not to like? For the answer, let’s take a little trip down memory lane.

Once upon a time, not too long ago, many American families discovered that they had become ‘house rich’. Not satisfied to have mere ‘paper profits’ they began converting the free equity in their houses and taking the cash as home equity loans. Before you knew it, homeowners everywhere were using their new found wealth to go out and buy things. Expensive things. Things like giant TVs (which used to be very expensive) and new SUVs and exotic vacations. You get the idea. It was so easy to get that home equity loan. You could pull out say 20 or 50 grand from your house and have a lot more fun in your life. Now, here’s where that gets a bit tricky. Some borrower people would not realize that the tens of thousands that they snuck out of the house — and then spent on consumables – was not just actually gone but it was, even more actually, still owed! And then the worst thing happened: house prices started to settle back to Earth. This is how one converts an unrealized gain into a realized loss.

A few paragraphs back, we acknowledged that ‘nearly all’ of our clients are pretty smart people. As such, they (you) are not likely to make foolish decisions. We expect that the smart people know the value of focusing on wealth creation in the good times and wealth preservation in the more difficult times. It’s also helpful to avoid the gambler’s trap that creates the false confidence that comes along with winning. That’s where you think you’re playing with ‘the house’s money’.

Ron’s Market Minute – About the Time I’ve Figured out the Key to the Investment Universe…

The rest of that phrase goes ‘Some dang fool goes and changes the locks’. Some other basic phrases I’ve saved over the years include these:

There are no sure things on Wall Street.

The market will do whatever it has to, to embarrass the greatest number of people to the greatest extent possible. 

That last one is certainly one of my favorites. Still, ever since I began an in-depth study of technical analysis, the one thing that has remained constant is the law of relative strength. In the same way that you believe the football team with the most wins has the best chance of winning the Super Bowl, the stocks and sectors with the biggest price gains have typically been the ones that out-perform those with the smaller gains.

With that in mind, the strong areas of the market this year have been Materials, Financials, and Energy. See chart 1. The blue line is the average return of these three sectors so far this year.   If you bought them on Jan. 1st, you’d be up about 8% so far. You’re welcome.

On the other hand, the weak areas of the market this year have been Technology, Consumer Discretionary, and Utilities. See Chart 2. The blue line is the average return of these three weaker sectors so far this year. They still went up (in aggregate) and your return for owning them so far this year would have been 6.6%. Still up, and not bad for the weak sectors. 

Until this past week, however, the charts have zigged and zagged so much that they were almost undecipherable. That makes a strategy of holding the strong suits hard to implement.  However, this past week the weak sectors went down, and the strong sectors went up. 

I think the line from a poem by Robert Browning is fitting – ‘God’s in his heaven, all’s right with the world’. And when markets do what technical analysis suggests they should do, that’s how it feels. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners for use with advisory clients only and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email, please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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Past performance is not a guarantee of future returns.