I was asked on the radio yesterday if I was seeing anything positive in the market. It was about an hour after the market close and I had just watched another wave selling of selling hit the major averages late in the session. Tuesday was another day of institutional selling that saw a lot of growth names reverse after early strength -- a harsh reminder to investors that the market remains in a downtrend and a risky environment for new buys.
On Monday, I saw the Russell 2000 SmallCap 2000 Index complete a bearish head-and-shoulders topping pattern. And if that weren't enough, my growth screens are a complete mess, filled with damaged stock charts that will need more time to repair.
Bearish stock charts clearly have the upper hand over bullish ones, but that will change when new money starts to come in from the sidelines again.
One industry group in the market that continues to hold up well is the home builders. They were under accumulation again Tuesday, helped by the latest reading from the National Association of Home Builders/Wells Fargo builder sentiment index that showed confidence among U.S. builders rose to the highest level in five years. The index rose to 29 in May, the highest reading since May 2007 and up from a downwardly revised reading of 24 in April.
Earlier today, April housing starts came in better than expected at 717,000, up from an upwardly revised 699,000 in March. March was initially reported at 654,000. Building permits fell to 715,000 from an upwardly revised 769,000 in March.
Buying the home builders is one of the most counterintuitive trades out there as plenty of questions still exist about the underlying health of the housing market. What's important to keep in mind is that many home builders are back in growth mode and their charts look great.
Standard Pacific (SPF) is a low-priced stock, but it brings plenty to the table in terms of fundamental and technical strength. The company primarily targets move-up buyers in metropolitan markets in California, Florida, the Carolinas, Texas, Arizona, Colorado, and Nevada.
It has a market capitalization of $1.1 billion and is very liquid with an average daily volume of 3.9 million shares. In its latest reported quarter, it earned $0.02 a share, reversing a year-ago loss. Sales growth accelerated for the second straight quarter, rising 57% to $227.3 million. The stock staged a heavy-volume breakout in late April and continues to hold near highs. It's a little extended here so, I'd wait for a pullback to support around $4.80 before considering a position.
One of the best charts in the group belongs to Ryland Group (RYL). It also broke out in heavy volume in late April. Take a look at its chart below and notice the tight weekly closes post-breakout. This is a sign of strength and support. I wouldn't be surprised to see the stock take out a new swing point of $23.45 shortly.
In 2011, the company lost $0.27 a share, but this year annual profit is expected to come in at $0.50 a share. Next year, annual profit is seeing rising 176% to $1.38 a share.