Contrarian Alert: Five New Long Term Buys

Stealth Money is quietly sneaking into a beaten up market sector.

Image courtesy of dreamstime.com.

A lot can happen over the next few days, starting with Friday’s employment report. Yet, I’m noticing one sector of the stock market which is attracting money in the stealthy manner that is often a sign that big money is bargain hunting.

Over the past few weeks, I’ve been cautious on the market for obvious reasons. The daily volatility and the intensity of the market turns has made it difficult to pick stocks. Certainly, given the geopolitical situation and the goings on in Washington, this could go on for some time.

Market Update

As I noted this weekend, traders have hit the Sell Everything button and these types of selling sprees usually set up nice buying opportunities. It’s never certain when that opportunity will be fully fleshed out, but there are reliable signs which increase the odds of successfully sorting the situation out. And I’m seeing some of those signs developing in one sector of the market - housing.

As always, my first look is the New York Stock Exchange Advance Decline line (NYAD), which filters out the noise in the indexes caused by heavily overweight stocks such as NVDIA (NVDA). This morning, NYAD fell below its 50-day moving average, which is a negative development. The silver lining is that the RSI is getting close to oversold. A reading of 30 would signal that the worst part of the decline may be close to ending.

Next is the bond market. The U.S. Ten Year Note (TNX) yield is back on the rise moving back above its 200-day moving average. That’s what I’ve been expecting in the short term as the RSI for TNX hit 30 last week. Thus, Friday’s employment report will likely settle the score. A weak report could push TNX below 4%. A stronger than expected report, could send TNX back above 4.5%.

The effect on stocks could be very negative as a rise in bond yields would suggest that the Fed isn’t likely to lower interest rates anytime soon.

For its part, Bitcoin has found some support as talk of a government funded Bitcoin reserve is rising and a potential announcement of terms may come as early as Friday – adding potential fuel to the fire after the employment report.

The sector I am referring to is housing, where as the S&P 500 Homebuilder Index chart (SPHB, above) shows the last six months have seen a nearly 35% decline in prices. This decline has mostly been due to high mortgage rates. Yet, despite the decline in the homebuilder stocks, homebuilders continue to sell houses, albeit at a slower pace. They’ve also continued to make money despite shrinking margins. In addition, because there is a housing shortage, demand remains high while supplies remain tight.

The result is that the homebuilder sector is now trading at less than 10X earnings in a market where any sustained decline in mortgage rates will likely revive the shares.

Thus, despite all the potential macro possibilities and the ongoing market volatility, I’ve found five stocks with excellent long term potential selling at bargain prices which are sporting the signs of a big investor (maybe Warren Buffett) building positions.

Thanks to everyone for your ongoing support. I really appreciate it.

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