Short Squeeze Before ... Or In For A Rude Shock Anyway?

Jim Reid, the strategist at Deutsche Bank, writes today:

July proved to be a horrible month for the US housing market as the expiration of the homebuyer’s tax credit deeply impacted transaction volumes. For the second day in a row we saw terrible US housing numbers as yesterday’s new home sales report extended the very poor existing home sales data released on Tuesday. New home sales fell by -12.4% to 276k units in July, a record low since the data series started in January 1963...

Interestingly the two housing reports actually marked the low point for risk on both days. The S&P 500 was -1.14% post yesterday's data but recovered steadily throughout the day to close +0.33% higher. The data was brushed aside by the homebuilders for the second day (+3.73% in the session). Indeed the sector has gained +7.2% since the release of Tuesday’s existing home sales data. There does seem to be a belief that July will mark a bottom in activity given that it was the first post tax credit month. Whilst this may be true we suspect that there has been a psychological shift against housing amongst US consumers...

Given the weakness in data yesterday, which included a very weak underlying Durable goods orders report, we have to admit that the resilient of equities markets was somewhat surprising. Is the data getting so bad that QE2 is now more likely than it was 48 hours ago? ...

Then, Albert Edwards, the global strategist at Societe Generale, writes also today:

So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the nationwide manufacturing ISM slides below 50 into recession territory in coming months. Indeed the new orders data for August, already reported in regional ISM's suggests the equity market is going to get some sentiment crushing data in the very near term. ...

Click on chart to enlarge, courtesy of Societe Generale.
Now, when bad data are increasing the likelihood of QE2, JPY is weakening for the second day on speculation Japan to intervene, and the resilience of markets in face of really bad data does suggest a short squeeze before a rude shock?