Good afternoon friends and fellow traders. How was your Tuesday? Before we get neck-deep into today's newsletter, I wanted to take a couple seconds to respond to something I'm sure at least some of you saw today, and something I'm willing to bet the rest of you will see (or see something like it) pretty soon. That something is Henry Blodget's commentary he posted over at Business Insider today. I'm not going to regurgitate the whole thing, because the opening paragraphs more than make the point. He says, "I believe stocks are now so expensive that they will likely deliver crappy performance over the next decade. I also believe that there is a decent chance of a 40%-to-50% crash in the next couple of years....This view is based almost entirely on valuation: According to most historically valid and cyclically adjusted pricing measures, stocks are at least 50% overvalued..." At the core of his concern is the combination of too much confidence, thinning profit margins, and what Blodget describes as "every valid valuation measure" that he looks at. Truth be told, I understand where he's coming from when he makes the more detailed bearish case here. I do take issue with one of his premises, however, and it's a big one. What's that? After being in this business for 15 years (and being a guy who's spent a lot of that time making those if/then models based on earnings and economic data), there's one thing I'm certain of, and it's that the market has a way of defying these models once they've been discovered. See, hindsight is 20/20. It's real easy to look back and assume you've found the correlation between a certain condition and the impact it may have on a stock or stocks. I know it's easy, because I've fallen into that trap before... in my younger years when I was smart, but not wise. Trust me - there's always more to the story, and there's always an important piece of the model that's missing. It's true for economists, analysts, and traders. There are just some things you're not going to know, and it's those things that can make or break you. My point is, while a bunch of these high-profile guys make great bearish arguments based on data, the very, very best people in this business - and you rarely hear from them - are the ones who can reassess the market's health every single day by looking at all the data with an unbiased eye. They're the people who never make a quick decision even though the talking heads on TV are screaming at them to do so. They're the ones who recognize there's no consistent algorithm you can use to trade stocks, or to grade the economy. Don't get me wrong. I'm still going to use TradeStation and all my other mechanical analysis tools I normally use. I'm certainly not going to use them to scare the daylights out of any of our readers though, any more than I'd use them to encourage you to blindly pour all your money into stocks and not look back. We're just going to add every data nugget we come across to our bigger-picture analysis as we get it from one day to the next, to paint a total picture rather than one day's or even just one moment's picture. And, we'll be better off for it. By the way, though we have concerns about the market and the economy, we're bullish. We're not expecting a 50% plunge in the foreseeable future either. We'll give you our bigger-picture assessment sometime later this week. Speaking of adding one day's data to the whole longer-term enchilada... Real Estate Still Stuck in First Gear Since we opened this can of worms last week, we need to follow up on it this week just to complete our picture. What I'm talking about is the current status of the real estate and construction market. You may recall last week we got something of a mixed message for real estate and construction. Housing starts fell a bit in February, while permits were up a tad. Existing home sales were basically flat. Yet, when one takes a step back (like we did), we can see that existing home sales have flattened at a lackluster level, housing starts are still broadly trending higher, while permits in February were almost at multi-year record highs. All in all it suggested the housing/construction market was merely mediocre, though you would have never fully understood that if the only data you got was the month-to-month change you typically get from the media. That's why we insist on making these charts for you guys... you get the whole picture, and context. Well, we're going to round out the real estate picture for you today, as we heard the latest Case-Shiller number, the latest new home sales figure, and of course, the FHFA housing price index on Tuesday. With this data, we can complete our real estate report card for the month. As they say, read 'em and weep.... or celebrate. You could still do either. The Case-Shiller 20-city Index was up 13.2% (though that's for January), new home sales fell from a pace of 455K to 440K, and the FHFA housing price index was up just a tad. These numbers are just as mediocre as last week's housing data was, underscoring the notion that the real estate market is neither hot nor cold. The chart of all this data does nothing to change that theory. As for what it means to you, while it's not "bad" per se - particularly for the homebuilders - it's not "good" either. It's a C+, to put it in educational terms. While I don't want to say this is a reason to sell homebuilder stocks, I will suggest in my humble and completely fallible opinion that I see much stronger sectors and industries out there right now. A Tale of Two Markets Just when I thought the market couldn't get boxed-in anymore, it gets put in an even smaller box. I think I mentioned this to you last week, but it bears repeating anyway - not only has the S&P 500 been trapped between 1884 and 1840 for the past three weeks, it's actually been getting squeezed between a falling resistance line and a rising support line (yellow) for the past two weeks. It doesn't really mean anything to us, as the index is going to have to punch its way above 1884 or below 1840 even when one side or the other of the wedge shape is broken. But, it's more evidence of how the market is getting pressed in both directions. Still, the bulls made progress today... enough to push the S&P 500 back above the 20-day moving average line. The VIX is headed lower too. Take a look. Now, keep the S&P 500's modest bullishness in mind and take a look at what the NASDAQ's chart looks like as of Tuesday. Though it technically closed higher, it struggled all day long just to eke out a pretty pitiful gain of 0.19%. It's also worth noting how the volume behind Tuesday's gains was, while respectable, clearly less than the selling volume we saw on Friday and Monday. I'll also point out that the NASDAQ Composite's Volatility Index - the VXN - is acting like it wants to go higher even if the VIX isn't doing the same. Even more alarming is how even with the gain today, the NASDAQ still closed below what hade been a key support line at 4240. It just didn't close convincingly below it. What's it mean when you put it all together? Well, we're still on the fence, perhaps even more so now that the NASDAQ is hinting at one thing and the S&P 500 is suggesting another. Like we told you yesterday though, the NASDAQ is the index to watch, as it tends to lead the rest of the market. One more lower close under 4240 (well, actually below Monday's close of 4226) may well start the selling avalanche that brings the other two indices with it. The Dow and the S&P 500 will also need to break under their key support levels as well, of course, but if the NASDAQ breaks down, it's not like the floors for the other two indices are going to put up much of a fight. Once they buckle, there's not much left to hold stocks up. I'd love for my worry to be unmerited, but I'm not doing you any favors by pretending there's no risk here. And until the S&P 500 breaks through the ceiling at 1884, there's little in the short-term to be excited about.