Ominous Tops and Bottoms
(February 4, 2005)

The two most ominous pictures coming from the charts over the past couple of years or so are shown below. The first is the potential reverse head and shoulders formation on long term interest rates. It hasn't happened yet, but from late 2001 through today, all the makings for a reversal are working themselves into place. If rates begin to rise from here (4.478%) and break through the neckline at 5.6%, it will be a fait accompli. The tide will have turned and everything that depends upon cheap money (real estate in particular) will be hurt accordingly. 

And Fannie Mae is certainly doing its part to play along with the scenario. Starting with the left shoulder in 1999, then continuing to the head throughout all of 2001, and finally to the right shoulder in 2004, it all looks very troublesome. The neckline here would be in the $60 area. A drop into the mid-$50s would mean a horrendous amount of resistance above $60, almost insuring a lower price.

Neither of these assessments are meant to suggest or recommend investment decisions in these particular securities. Rather, it is just a warning to keep an eye on these two bellwethers and act accordingly in the event a change in the big picture occurs. If Fannie breaks, it will mean difficult times ahead for the real estate industry and all parts of our economy that depend on its good health. Every day the markets are open for business; every day adds another piece to the puzzle. 

Charts courtesy of StockCharts.com