The Bullish Case for Stocks: It All Depends on 3 Big Ifs

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The stock market has been on a nice rally since the New Year, putting this question on every investor's mind: Will it continue?

David Rosenberg answers the all-important question: Are there drivers that can sustain further gains in equities after a huge advance?

The three Ifs
"What is most important is not looking through the rearview mirror, but driving ahead by focusing on what is happening through the front window," says Rosenberg.

He reasons that going forward, there are essentially three big "ifs" that will determine the market's continued climb or fall:

  1. IF the housing market recovery story is substantial: Although the housing and construction data has been recently optimistic, many are concerned that when the backlog of foreclosed homes hit the market, the market will find itself worse off than expected.
  2. IF China actually has a soft landing: Recent data out of China suggests it will have a soft landing, but many are still skeptical, especially about a Chinese housing bubble.
  3. IF Europe doesn't collapse (hang in there!): European Banks are doing quite well in the New Year. Otherwise, no news is good news?

THEN, the market may be alright. "One can build the assumption that, if all goes well, the forward P/E multiple reverts to 15X, where it was before the trap door opened up last spring..."

Comforting?

Business section: Investing ideas
So, we'd like to focus on investing ideas with an exposure to No. 1. The housing market. Are there any housing-related stocks seeing a turnaround in bearish sentiment?

For ideas, we collected data on short-seller trends and identified a list of housing-related stocks that have seen a sharp decrease in shares shorted over the last month (i.e., a decrease in bets that these stocks will decline).

This is significant, especially when you consider that short-sellers tend to be more sophisticated investors (because they require strict credit approval to perform these trades). So if these investors are turning bullish on a stock, it's worth paying close attention.

Short-sellers think the upside potential of these stocks outweighs the downside -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Ryland Group: Operates as a home building and mortgage-finance company in the United States. Shares shorted have decreased from 7.24M to 6.29M over the last month, a decrease which represents about 2.3% of the company's float of 41.36M shares.

2. Beazer Homes USA (NYS: BZH) : Designs, builds, and sells single-family and multi-family homes in the United States. Shares shorted have decreased from 12.55M to 10.98M over the last month, a decrease which represents about 2.51% of the company's float of 62.67M shares.

3. Vulcan Materials Company (NYS: VMC) : Engages in the production and sale of construction aggregates for the infrastructure industry primarily in the United States. Shares shorted have decreased from 18.23M to 15.72M over the last month, a decrease which represents about 1.95% of the company's float of 128.64M shares.

4. Armstrong World Industries (NYS: AWI) : Engages in the design, manufacture, and sale of flooring products and ceiling systems in the Americas, Europe, and the Pacific Rim. Shares shorted have decreased from 2.09M to 1.87M over the last month, a decrease which represents about 1.07% of the company's float of 20.65M shares.

5. Texas Industries (NYS: TXI) : Engages in the production and supply of heavy construction materials in the United States. Shares shorted have decreased from 5.36M to 5.05M over the last month, a decrease which represents about 2.28% of the company's float of 13.58M shares.

6. Avalonbay Communities: Engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities in the United States. Shares shorted have decreased from 9.24M to 7.96M over the last month, a decrease which represents about 1.36% of the company's float of 94.23M shares.

7. Associated Estates Realty (NYS: AEC) : Operates as a self-administered and self-managed equity real estate investment trust in the United States. Shares shorted have decreased from 2.41M to 1.98M over the last month, a decrease which represents about 1.06% of the company's float of 40.53M shares.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.Short data sourced from Yahoo! Finance.

At the time this article was published Motley Fool newsletter services have recommended buying shares of Vulcan Materials. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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