Most everything I see says the market is overdue for a strong rally. Sentiment is bearish, RSI is low, etc. We did get a bit of a rise on Friday, but it was hardly strong. As the market stays oversold, the risk of some kind of panic low to scare out the weak hands increases. Be careful out there.

Got tired of waiting for the bounce, so I added some SPX puts. I hate selling into an already oversold condition (NDX 5-day RSI is only 17), but the possibility of a steep decline can’t be ruled out given the inability to mount a rally so far. There are still long positions to be exited after a suitable rally so there is room for gains still if this does the “right” thing, that is, rallies and then fails. Also sold a little PWI to raise cash for expenses.

The following was written by California real estate investor, educator, and author of the California Crash report, Bruce Norris:

“The word ‘bubble’ has been used so often it has lost its significance. Many economists scoff at the idea while others have been waiting for this over-priced real estate market to ‘crash’ for years. Somewhere in the middle lies the truth and the consequences will be felt by hundreds of thousands of unsuspecting real estate owners. By the end of 2007, no one will need to ask if there had been a real estate bubble.

“The United States has a few areas with significant price bubbles. One of the worst cases is right here in California. In 1997, California’s real estate market was at bottom and many did not want real estate as an investment. As an investor, I personally purchased numerous three bedroom homes for $35,000. Today they sell for $300,000. One has to wonder, will someone be able and willing to pay for that home when real estate loses its ‘glitter?’

“Let’s paint two pictures of the ‘mood’ of the typical buyer of real estate. The first will be a buyer in January 1997. The median price in California was $177,600, the median income was $44,385, interest rates were 7.5%, and affordability was 40%. Ownership of real estate was within the grasp of a very high percentage of Californians. However, the years preceding 1997 had been bad for real estate. Prices had gone down and people weren’t excited about real estate. They shifted their interest and money to the stock market creating a price boom there. In January 1997, I wrote a report titled The California Comeback, which predicted prices would double by 2005. It was laughed at because the ‘mood’ for real estate was lousy and economists and investors alike ignored the underlying statistics that mattered.

“In 2006, the median price stands at approximately $540,000, the median income is $60,379, interest rates are off their lows and all the way up to 6.5%, and affordability is 14% for the past few months (16% for all of 2005). To qualify for a home, many buyers are stretching their budget as if there was no tomorrow. Lenders have become a willing partner in this dance of debt. As long as prices have moved upward, everyone is lulled into thinking all of this makes sense. Tomorrow is just around the corner for many of these aggressive buyers and lenders. In 2006, there exists in the entire country 8 trillion dollars of debt. Approximately 1.3 trillion of that debt will have its first payment adjustment between now and the end of 2006. Almost 15% of all the real estate debt in the country will have payments go up in a real estate market that has lost its ‘glitter.’ In California, the percentage is much higher because buyers stretched so hard to ‘get in’ on the booming market.

“Here’s how the California market will make the transition from boom to bust as outlined in our new report the California Crash. It starts with affordability getting too low. When so many people can’t afford the monthly payment, our market loses velocity. Because of that we sell less real estate. The first sign of this happening will be growing inventory of available homes for sale. Inventory has already doubled between 2005 and 2006, going from a 3.3 months supply to a 6.7 months supply. The good news is that the inventory is still mostly owned by people, not banks. That will soon change.

“The increase in inventory happens to the builders as well. They have a tougher time selling homes and offer discounts, incentives and cooperation with brokers. The bottom line is that the ‘mood’ will have changed. Unsold inventory means less homes being built in the future. This creates a domino effect because the builder has to lay off workers. What does a drywall hanger do if all of California slows down? Most likely he’ll move to where he can find work. That’s the final nail in the coffin for a real estate market: negative net migration. When an area loses people, demand is gone and so is the artificial “stimulus” that caused the price boom in the first place.

“When this happens, real estate as an investment has to attract people because it creates cash flow instead of inflating in price. What percentage of our real estate market has been made up of investor purchases? Most estimates are around 20-25%. The truth is these people weren’t investors, they were speculators. You might say speculation has been a marvelous investment. However, speculative markets become overpriced because they ignore the underlying numbers. Why would you buy a piece of property in California, as an investor, for $450,000 when it will only rent for $1,500 a month? The only reason is that you believe it will be worth $550,000 next year. If the inflation of real estate ceases, you’ve just lost a pretty healthy percentage of our so called ‘demand.’

“As prices stop going up (in most California areas they already have), people who get behind in their payments have a problem. They don’t have sufficient equity in their properties to pay for the cost of a sale. Many of these owners of homes financed with adjustable loans will have no choice but to lose their homes to foreclosure. When foreclosures occur in a market where the ‘mood’ toward real estate has changed, more often than not, the lender ends up with the property. Now, when you and I want to sell our homes, we’ll be facing stiff competition from lender owned property, including HUD. These lenders can and will offer these homes at increasing discounts. This creates more problems for the seller because as values decline, equity shrinks. The last downturn saw trustee sales increase by 981%. I expect the increase this time to be 2,000%. Why? Because during the last down cycle, interest rates declined. Everyone who had an adjustable mortgage ended up with a gradually lower payment. I expect the opposite will occur this time.

“The builders will join in the party by offering their unsold inventory via auction. Since the ‘mood’ will have shifted, the owners who already live in the tract can expect to see the sale prices at the auction go below what they owe. It doesn’t feel very good to see your down payment disappear literally overnight, but that will happen.

“How many people will be affected? In some ways, we all will be affected. When prices go down we feel less secure about spending. We’ll probably go on a few less trips and spend a little less on toys. For some of us, these will be very tough times. When you lose your home to foreclosure, it’s pretty tough to take. The good news is that eventually California will recover, and the boom will start all over again. If you do happen to be one of the families who are affected, keep in mind that you’ll be able to buy another home in just a few short years. As it turns out, lenders are pretty forgiving.”

The Norris Group

“NEW YORK (Reuters) - Former Federal Reserve Chairman Alan Greenspan said on Thursday that the “extraordinary” boom in the U.S. housing market in recent years is over.

“This has been quite an extraordinary boom,” Greenspan told a Bond Market Association dinner in New York. “The boom is over. I think we can safely say that with a strong degree of confidence.”

Greenspan said there was a “high degree of froth in the system,” and that it was clear that home equity extraction and the turnover of home sales was waning.”

And where did the “froth” come from, Mr. Greenspan? Didn’t someone panic and cut interest rates to 1%, hugely negative real rates, causing a borrowing spree that drove the “boom”. So, Mr. Greenspan, what happens in the “bust” that follows the “boom”? While you are smugly collecting those $125,000 speaking fees, most of the American families who trusted you to maintain monetary discipline and good judgment will be financially devastated.

Sold most of VGPMX. Price momentum appears broken, interest rates are rising not usually a good sign for gold and gold stocks. Need to wait for clear signs of economic slowdown and lower rates.

Also sold the iShares Australia and added NDX puts.

Expecting to see a bounce anytime but downside momentum is pretty strong.

The Vanguard Precious Metals and Mining (VGPMX) typically invests in the stocks of foreign and U.S.companies principally engaged in the exploration, mining, processing, or distribution of gold and other precious metals.

iShares Australia - iShares MSCI Australia Index (EWA)

Nasdaq 100 (NDX) puts