One of the most intriguing questions these days is: how will we be able to tell the economy is rebounding?
The very fact we're asking ourselves this question is a sign that the complete despair that overtook the world during the September 2008-March 2009 period is now abating.
One of the most consensual answers to the question is : we'll know the economy is rebounding when the real-estate market stabilizes.
On that score, XHB, the housing market ETF has already rendered its verdict. Indeed, XHB is acting as if the real-estate market were in the process of stabilizing. It has been building a base since 11/21/08 and is therefore anticipating, if not an immediate rebound in the housing market just yet, at least no steepening of the decline and the possibility of a rebound at some point in the future.
One can therefore deduce that if and when XHB breaks out of that base in a decisive manner (somewhere above 14), it would mean the market (which conventional wisdom says is a 6-month discounting machine....when it is right, that is) has decided the housing market has turned the corner. Which would be a necessary though not sufficient sign the economy as a whole has also turned the corner.
And that's the problem! While such a move in the housing market ETF would answer our initial question, it would also open the way for a myriad new questions such as when will the rebound start, how strong will it be, how long will it last, etc...
That is what's so tricky about the concept of the stock market as a discounting mechanism. It is a dynamic, complex and hyper-sensitive discounting and prediction machine that might indicate one direction one second and a drastically different direction the next as new data, new sentiment and mood are digested.
Full disclosure: Long XHB
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