KBW Mortgage Finance Index – Bullish Breakout Imminent!

We have been bullish on the equity market since November last year and were quietly buying into the many days of weakness that followed the late November low. We were more or less fully invested by late February. Of course since mid March it has been a rather one way street. There has been so much to get excited about from a bullish perspective, particularly the broad participation of the rally, and confirmation from commodity, corporate bonds, emerging market bonds, and high yield currencies. However, there has been one thing that has been troubling us, that is, the lack of performance of the very sectors that got world financial markets in trouble in the first place. Those sectors are the real estate sector, and those sectors involved in financing real estate “ventures” (mortgage finance companies) and those involved in construction of residential and commercial properties. In short we would finally get some decent sleep at night once stocks like Ryland (RYL), KB Homes (KBH), PHH Group (PHH), Hudson City Bancorp (HCBK), Washington Federal (WFSL), Fidelity National (FNF), New York Community Bank (NYB), and First Horizon (FHN) as a whole broke out of their long term bear trend. There is an index called the KBW Mortgage Finance Index which includes 24 stocks involved in the mortgage finance sector and also the residential construction sector. The components are as follows:

We have noticed that this index has started to look rather bullish as of late and it is very close to breaking above a “key” resistance level. We doubt that anyone actually looks at this index or takes the performance of the components of the index seriously nonetheless the performance of these stocks as a whole suggests that something is happening in the real estate sector in the US and it is looking more and more positive as the days go by. Yes we are aware that an article highlighting the bullish appearance of mortgage houses and home builder stocks is going to be greeted with a hail of bearish commentary but perhaps that in itself is a bullish sign.

A break above 20 signals a multi-week high, actually a 10 month high! This suggests a change in fundamentals. It would also allow us to finally rest at ease each night knowing the back of bear market in the real estate sector had finally been broken.

Our wealth accumulation portfolio (Earnslaw) which consists of just 12 ETFs and a few options is the vehicle with which we manage our retirement funds. Earnslaw is up 29% this year with less than half the volatility of the S&P 500. Subscribers are privy to our holdings, capital allocations, hedging strategy, and to trades before we make them.