Correlation of Housing Market and S&P 500
Source: Birinyi Associates (23 Aug 2006)

Birinyi Associates, a research and money management firm in Connecticut, said there is a "very high correlation" between the National Association of Home Builders (NAHB) index, a measure of sentiment in the industry, and the S&P 500's performance on a one-year lagged basis.

The dramatic weakness in the NAHB index -- whose builder confidence measure sank to 32 in August from 39 in July to hit the lowest level since February 1991 -- is likely to be followed by a "significant decline in the stock market," said analyst Paul Hickey of Birinyi.

August was the seventh consecutive month in which the builder confidence index has fallen.

Birinyi said the correlation between the NAHB and S&P is 0.79 and covers the last 10 years. A correlation of 1.00, whether it's positive or negative, is a perfect correlation.