The stock market’s advance has diverged with the cumulative NYSE advancing issues minus declining issues in typical fashion of a top. Nearly one month ago we argued for a correction of recent gains before the next leg up coincident with the Christmas rally.

But the inability for the market to give up any ground amid a bullish sentiment reading not seen since the 1987 crash means that stocks are sitting precariously until they can digest some of the more recent gains.

In the chart to the right is a graph of the IYR Real Estate iShares. Notice that prices have reached the confluence of two rising trendlines at $122. The chart below that is of gold divided by interest rates. Said another way, when this ratio begins to fall we expect things that survive on the excess liquidity in the system to falter.

http://www.fxmoneytrends.com/weeklycommentcharts/12.17.04.IYR.GIF

Lets also consider three developments. First is housing starts plunged this week. But starts were in a decline all year even as building permits were hitting new highs. Moreover, the 12-month ROC in construction spending broke its uptrend line last month indicating two clear divergences between IYR and the fundamentals.

Another amazing statistic is that the Put/Call ratio has surged in one month from 1:1 to 5:1 a near record. While this can often act as fuel to a short covering rally, we feel that the sudden jump (before the housing numbers were released) may be an indication that market players are well aware of the risks to real estate funds.

- Jes Black