Today the National Association of Realtors reported that sales of existing homes fell by 8.4% in 2006, the biggest annual decline since 1989, when existing home sales fell by 14.8%. In spite of the drop in sales, the median price of an existing home sold in 2006 rose 1.1%. By comparison, he median home price rose 12.4% in 2005.

I mention this because I find it an interesting contrast to what I am going to tell you next. Over the past 30 days, four of the top six performing exchange-traded funds (ETFs) were real estate funds. Their gains ranged from a low of 8.67% to a high of 9.8%. That is a pretty decent gain for one month. And the past month hasn’t exactly been a fluke. Over the past six months these funds have gained about 25%, substantially better than the impressive 14% gain turned in by the S&P 500 over the same time.

What is really unusual is that this has occurred during a period when all the headlines have been about a serious real estate slump. I’m not smart enough to explain exactly how real estate can be both a strong and weak sector at the same time. I suspect it is because there really is not a national real estate market. Instead, national real estate is really a conglomeration of regional markets. And while there are certainly areas where real estate prices have nosedived, throughout much of the country the real estate market is stable.

The black line on the chart below shows how iShares Cohen & Steers Realty (ICF) has fared over the past six months. The other lines provide some interesting comparisons. The gold line is the S&P 500. The red line is United States Oil (USO). The blue line is iShares S&P 40 Latin America (ILF).

International funds–particularly emerging market funds–continue to outperform the general U.S. market. Over the past 30 days the top performing ETF was iShares MSCI Malaysia EWM, up 15.36%. But there are many other international ETFs that are producing steady gains.

I’m including a list of the top 60 ETFs over the past month so you can see what sectors are doing the best. The worst performing funds over that time are energy funds and short funds.

Have a great weekend. I’m looking for the deep freeze to end. It’s been a cold winter so far in the Mountain West.

F.S.

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With all of today’s positive economic news, it was a little surprising to see a less-than-enthusiastic reaction from the markets. While the Dow continues to plug along, the Nasdaq has not been able to keep pace. The good news today came from several sources:

• The Labor Department reported that 2006 inflation was just 2.5%, the best since a 1.9% rate in 2003.
• Jobless claims fell to their lowest level in 11 months.
• December new housing starts rose for the second straight month.
• Oil prices fell to a 20-month low on reports of growing oil and gas inventories.

But gloom and doom hit the markets  when Federal Reserve Chairman Ben Bernanke warned Congress that major changes are needed in Social Security and Medicare to avoid serious damage to the U.S. economy. His concerns relate to the pending influx of retiring baby boomers. “The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago,” he said.

Bernanke explained that Federal spending for Social Security, Medicare and Medicaid will total about 15 percent of the gross domestic product by 2030, compared to roughly 8 1/2 percent of GDP in 2006.

“In the end, the fundamental decision that Congress, the administration and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare and Medicaid,” he said.

A week ago the Nasdaq finally looked to be renewing its advance. But this week, it has given back all of those gains and is again sitting right at key support levels. On the chart below you can plainly see the index’s attempt to break out last week. The gold line is a 50-day moving average and the index is now resting right on that line again.

The bottom portion of the chart is a moving average convergence divergence (MACD) and it also confirms the picture of an index starting to move up but then pulling back.

Traders have short memories when it comes to comments by Fed officials. So we can hope that Bernanke’s remarks will not continue to be a drag on stocks in the days to come. Although his comments are significant and valid, this is a long-term problem and it is unlikely that Congress is going to take any action in the near future. Nevertheless, we still find ourselves in a position of having to carefully monitor market movements over the next few days and to be wary of any growing weakness.

F.S.

With the start of a new year, it’s only natural for investors to reflect on the previous year and try to make some determination about whether or not it was good. Part of that process usually involves comparing our returns against those of a neighbor or of and index like the S&P 500. Unfortunately, these types of comparisons usually are misleading and cause a lot of frustration.

Instead of these types of comparisons, professional money managers generally aim for a specific percentage gain. For example, the target for a conservative account might be 6% or 10% for an aggressive account.

A former colleague is now working on the East Coast managing a pension fund with more than $300 million. In 2006, the S&P 500 was up about 15%. So what do you guess would be a satisfactory return for this pension fund? Twenty percent? Twenty five? The fund’s actual return in 2006 was 11% and that return was good enough to ensure that everyone involved got substantial bonuses. Their annual target return is 8%, which happens to be a very good return over the past several years. Since the start of 2000, any manager who has earned an average annual return of 8% would be wooed by some of Wall Street’s biggest firms.

(One interesting side note, when this pension fund has positions that aren’t doing too well, the manager tends to invest more money in those holdings rather than reallocating to the better-performing positions. That is the exact opposite approach that most individual investors take.)

Investors tend to have short-term, selective memories. Over the past six months the stock market has done fairly well. As a result, many of us are starting to have unrealistic expectations about how much our investments should be earning.

Let’s bring everyone back down to earth with an examination of what the markets have really been like in recent years. The chart below shows a comparison of the S&P 500 (black line) and the Nasdaq (gold line) since the start of 2004. Notice that over that entire three year period, the S&P 500 is up about 26% and the Nasdaq is up about 22%. So that is an annualized return of about 8% and 7% respectively. That doesn’t seem too bad. But that number is a little misleading because investments do not advance at a steady rate.

Look mid-July of 2006. At that point the S&P 500 was up just 10% over 2.5 years and the Nasdaq had advanced just 1%. So the bulk of the gains for these indices occurred in the past six months. And if you look at the overall choppiness of these indexes for the past three years you see that it would have been very difficult to make any money at all until the past six months. In fact, in July 2006 the Nasdaq was lower than in January of 2004!

Now let’s take a longer view, back to the beginning of 2000. In 2006 there was a lot of news coverage devoted to the Dow making a new all-time high. But remember, the Dow is just 30 stocks and is a very narrow index. Obviously the S&P has 500 stocks and the Nasdaq has more than 3,200. So these indexes are probably going to give a more accurate view of how the overall stock market is faring.

As you can see on this chart, since the beginning of 2000 the S&P 500 is down about 5% and the Nasdaq is down 40%. Suddenly 8% a year doesn’t seem so bad!

Like so many things in life, investing is all about timing. Someone who started investing in 1995 probably made a ton of money by the end of 1999, no matter what investments he chose. But an investor who started in 2000 is lucky if he has broken even between then and now.

The past couple of weeks I’ve written about weakness that the Nasdaq is currently experiencing. But so far the index has managed to stay above critical support levels. And the S&P 500 and the Dow are doing better than the Nasdaq. Economic fundamentals remain strong. So while we will probably see more sideways market action, I do not anticipate a major correction. Certainly investors need to be cautious right now, but there are no technical or fundamental indicators pointing to an imminent bear market.

With the lower price of oil and the Federal Reserve no longer raising interest rates, 2007 could easily turn out to be the best year for investors since 2003. Keep your fingers crosses and hold your positions.

F.S.

Over the past two or three weeks I’ve mentioned a few times that in two of the past three years we have seen a significant market correction in January. Now the New Year is here and while a major sell-off hasn’t started yet, there are plenty of indications of market weakness, especially for the Nasdaq.

Let me illustrate what I mean with the chart below. The top portion is the daily price action of the Nasdaq (black line). You can clearly see that after peaking in November, this index has lost momentum and has been drifting sideways. The gold line is a 50-day simple moving average. After trending strongly above this line since mid-August, the Nadaq is now resting right on its 50-day MA.

The next portion of the chart is a Relative Strength Index. This important line on this indicator is the 50 mark. When the index is trending above that line, momentum is positive and the index has the strength to advance. If it trends below that mark, momentum is negative and there is not enough strength to sustain and upward trend. Once again we see that the index is hovering right at the 50 level.

The next portion of the chart shows a moving average convergence divergence (MACD). On this indicator the zero line marks the point that separates positive and negative market movement. Once again we see that the indicator is right on that border.

Finally, the bottom portion of the chart shows a momentum indicator. Black areas above the zero line show positive momentum and blacks areas below that line reflect negative momentum. Momentum is currently right at the zero mark.

What all this means is that the Nasdaq is at a critical juncture and investors need to carefully watch positions that are highly correlated to the Nasdaq. For now, the S&P 500 and the Dow remain in uptrends and have not shown the same level of weakness as the Nasdaq.

Today’s strong move by the Nasdaq was encouraging, but we saw a similar gain quickly disappear during Tuesday’s trading session. It is too early to declare the end of the bull run that began in late summer 2006, but there are cedrtainly plenty of signs right now telling us that we need to be cautious.

F.S.