A strange correlation between capacity utilization and housing sector points to lower stock and real estate prices ahead
Sam Adelton
Nov. 26, 2006

In the last one hundred years, three times before the capacity utilization in the economy was boosted by the housing boom. The most significant was that between 1983 and 1987. Each time the hosing sector collapsed first and then it drag the stock market lower by a huge amount. The pattern shows, in each of these cases the housing market starts declining first, the stock market for months keep raising. The complacency increases, the money shifts from real estate to stocks. Then stocks start forming a parabolic top. Then finally stocks go down violently leading the bear market.

This time we are watching the same. The capacity utilization is in eighties. No one can call it a recession. The robust growth though is fueled by war, housing and China-India effect. The production of semi-finished goods have reached the highest output level ever.

The war will be scaled down as troops will come back slowly. The new home sales have collapsed. Builders have stopped building new homes unless there is a real demand and parcel of land is real good.

The stock market is still marching ahead with very high complacency as manifested by the VIX – the fear index in Wall Street. VIX fell below 10 last week!

The historical pattern shows high probability of a majir bear market in stocks in 2007.

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