Wouldn’t it be nice if this headline were true? In fact, things in the housing market are still going the other way. Foreclosures are continuing to rise despite all of the efforts to stop them. And according to some sources, banks are stalling on foreclosures because they really don’t want to deal with more property right now.
In spite of obviously bad fundamentals in the real estate market, real estate stocks are doing very well. This is probably the underlying reason why emotional asset allocation is so unsuccessful. The news is scary, but if you had reacted to it with fear and sold, you would have made a poor decision as the stocks have been very good. The Alice-in-Wonderland quality of the financial markets gives retail investors fits-sometimes it just doesn’t seem to make sense. On the other hand, if you are using a systematic trend-following process, you go with what is, not with what you think is going to happen based on your intuition or fears. The disconnect is often because investors wrongly believe that the stock market reflects reality, when, in fact, it reflects expectations. (Expectations aren’t always accurate, by the way. When new information causes them to change dramatically, it can make for turbulent markets.)
As the old saying goes, in theory there is no difference between theory and practice. In practice, there is.
