The best opportunities for making wealth are found in markets that are undervalued and hated by the masses.
While most people are chasing the latest “fad” or markets that have already exploded higher, we search for those that are ignored but have great upward potential in the months and years to come.
One word of warning though: this will require a lot of patience on your part but the potential returns will be worth the wait.
Let’s look at 6 markets that I consider are “cheap” and hated:
Steel stocks have to be the most hated industry in the world. Their shares have been slaughtered by a 75% drop since 2011.
Take a look at this chart of the US Steel Coporation (X):
Despite the crash in steel stocks, there are growing signs that this downtrend is coming to an end.
For example, housing construction and real estate is up in parts of Europe, UK and the US. The demand for steel is slowly growing in both the housing and the auto industry.
From the chart (above) we can see positive divergence, which is a sign of strength and a potential reversal. This is shown by LT Divergence (see the red dashed lines). The reversal could be short term or long term.
I like to combine divergences with the LT Pulse. If a pulse fires long. this will be a buy signal. A close above $19.30 is what we need.
Also keep your eye on AK Steel (AKS) which is only $3.47 right now. Both stocks can be found on ETX Capital trading platform.
International Business Machines (IBM) has taken quite a beating lately. Take a look at its daily chart:
LT Divergence is showing to us that IBM’s downward decline is weakening and that a reversal is highly probable.
IBM is also undervalued: it has a P/E ratio of 13.86 and a PEG ratio of 1.09. Stocks with P/E ratios over 20 and PEG ratios over 2 are considered to be expensive and over-valued.
Would I buy IBM right now? Probably not yet. IBM is one of the key stocks in the Dow Jones 30 index. Stock indexes have a history of performing very badly in September, which means that if they fall, IBM will fall further.
As with steel stocks, keep IBM on your watchlist.
Emerging Markets: Singapore (EWS)
Emerging market stocks such as India, Russia, Brazil and China have been one of the most depressed sectors recently. Ben Bernanke’s words about tapering QE did some damage to this market.
However, if you like me have a positive long term view about the future of these economies, and if you are patient, then this downturn is a great opportunity to find amazing bargains.
Let’s start with my favourite of this sector: Singapore, arguably one of the strongest and fastest growing economies in Asia. Take a look at this chart of EWS – the iShares MSCi Singapore ETF:
EWS is forming a double bottom (a bullish reversal signal) with positive divergence and a close above its 8 EMA. A perfect marriage! Notice also that the short pulse that fired in August has ended.
On its monthly chart (not shown) Singapore has pulled back and resting above its 50 MA. This is also a bullish sign.
I am considering to buy EWS this weeks at a pullback to its 8 EMA. I’ll use a stop-loss below the recent lows at $12.26. If I am wrong, the risk is small. If I am right, we have a potential for a great “buy and hold” opportunity for the months and years to come.
You can find MSCI Singapore ETF (as well as all other emerging market ETFs) in ETX Capital. Search on their platform by typing the country name.
Brazil is also one of my favourites. The mass protests in that nation have not helped their stocks but there are signs of recovery.
We have a close above the 8 EMA on the weekly chart and a double bottom on the daily chart (not shown). There is also a case for positive divergence on the chart above, although not confirmed yet.
Pullback on on MSCI Brazil ETF (EWZ) are buying opportunities to see if we can get some more follow through to the upside.
Out of all the emerging market stocks, India is so far the least I am confident about. That is mostly because the Indian economy is still facing some headaches and uncertainties.
However, it’s worth keeping an eye on this one as their stocks are dirt-cheap right now, and could possibly even get cheaper.
As you can see from the above chart, we had a volume spike in the last 2 weeks which is usually a sign of a reversal after a prolonged downturn. To play it safe it’s worth waiting to see if it can form a higher low.
Look for iShares S&P India Nifty 50 on ETX.
Gold Stocks (GDX)
There is no doubt that gold mining stocks have had a pretty bad few years (unless you were shorting them).
I am still not decided about gold stocks. I think there could be more downside to come by end of this year – but that’s probably because I’m biased due to my bearish outlook on gold.
Let’s take a look at the chart of the big gold stock fund GDX:
I think there is a potential short term swing trade opportunity here. We have put in a higher low and we are above the 50 Daily MA. A pullback to $27 or $26 region are buying opportunities. Stoploss beneath recent lows in August.
As long as GDX holds above $25, there is more upside potential in this “bounce” for gold stocks. But I still expect the downtrend in gold to continue as we go into 2014.
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Alessio Rastani is a stock market trader at www.leadingtrader.com