Doesn't it look fishy?

This is September. The weakest month historically for the stock market. We are at the beginning of the start of a (presumeably) prolonged housing market correction. we are in a very prolonged bull market that started way back in March 2003 (more than 4 years). And yet the S&P 500 just hit a new high for the year. Man! This gives me shivers. What is the market thinking?

All my research tells me that if not thinking gloom, we definitely not ought to party. Times will be quite tough ahead and probalby stay like that for quite sometime. And I am not alone. S&P Research is with me. Even they feel that either they are extremely pessimistic or Wall Street is extremely optimistic . Goldman Sachs has repeatedly said in their reports, that housing is potentially going to be a big drag on the economy and currently the effect has just started to trickle in.

Okay - one big reason why the market is so optimistic would be oil. That nobody can argue has seen a dramatic 22% fall in about two months. And boy nobody was expecting it. This was supposed to the storm season right? And where is Katrina or Rita? We haven't had a single storm even threaten the east and we are already more than half way into the season (and I wish that it remains so not only this year but all years in future). This is obviously very good news both for the people and the markets. That means no disruption in the supply of oil - that probably was reflecting in oil prices when we started the season.

But here is my reasoning. When oil was hitting new highs few months ago, did anybody care that much? I don't think so. If that would be the case we would have seen the slowing of the economy - drying up the demand for oil. But consumers seemed ready to absorb the higher oil prices, albeit with a bit of frustration. So when oil prices are now down what difference it would make. From my perspective the rise in oil prices does not seem to affect the consumer outlook that much. At least in the near term. They call it inelastic demand. And another way to look at it would be, oil prices have come down because demand has dropped due to the slowing of the economy!

Now let us look at the other guy who can affect consumers and the economy - in a bigger way. The housing slowdown (or bust I should say). All major builders have warned of a slowdown. All housing reports (Starts, Inventories, New Home Sales, Existing Home Sales) point to the same direction - down. And keep that aside. If you are living in metro areas where prices have shot up crazy, don't you see too many "Open house" signs on the weekends. At least that you cannot miss! People could very recently borrow large sums in home equity and then spend it at a relatively low interest rate. That probably kept the economy humming. Now no longer is this possible. Not only can you not borrow easily (since your house soon won't be worth that much, and interest rates also are not that attractive), but whatever you have borrowed probably will have increased rates, plus your ARM might just be ending and you would need to shell out hundreds of more bucks every month to cover the higher interest rates. How much you save a month when a gallon of gas comes down by 15%?

Altogether I feel that the market has gotton too optimistic about the future picture. People are overlooking the looming danger of the housing slowdown and focusing on the short term reduction in oil prices. I feel soon the truth should come out. And it may well be in the favour of the current expectations. But I feel we are in for a surprise. Time will tell of course.