Doug Kass: After 4-7% Sell-Off, Buy These Stocks

Talk with any trader on the Street, and the conversation will quickly turn to the stock market rally and whether current levels can sustain.

The market’s recent march higher has been remarkable to say the least. The S&P is up about 8 for the year and more than 20 percent from October lows.

“Everyone on the Street is expecting some kind of pullback,” says Fast Money trader Joe Terranova. “The question is how deep will it be?”

Strategic investor Doug Kass is expecting a 4-7% decline. Just as he told us last week, Kass, who is president of Seabreeze Partners and a CNBC Contributor, again says his research suggests the path of least resistance is lower.

“It rarely pays to buy stock when 85% of the S&P trades above its 50-day moving average as is the case today.” Kass adds that the market also tends to decline when only a small number of S&P stocks are oversold, again the case now.

(Click here to go to our entire conversation with Kass on February 22nd)

And on Tuesday Kass told us he's spotted another bear signal. He's looked at how stocks fare when 10-week moving average of gasoline prices rises. “At the rate they’re moving now– historically it has not paid to own stocks.”

All told, the data suggests to Kass that the next leg in the S&P is probably 50-handles lower, give or take. However, as the market pulls back, Kass says put together a shopping list and get ready to pull the trigger.

He suggests Home Depot, Lowes , Bank of America , Citi and ETrade .

What's the common thread? All of these traders are tethered to the housing recovery, which Kass believes is about to get underway. (ETrade has a large home equity loan portfolio, says Kass)

“I do think we’re facing a lengthy and durable recovery in the housing market and the possibility exists that it lasts for the balance of the decade.

Although Kass concedes the sector still faces headwinds, he believes ultimately one factor trumps all others -- mortgage rates are very, very low.

Kass thinks that as the economy recovers people just won’t be able to resist the temptation of moving into a new house – “interest rates are at the lowest they’ve been in several generations,” he says.

In other words, buying a home will become a smart use of capital.

In fact, Kass thinks the public has already started to figure that out. He points to the housing activity in the corridor between Washington DC and Boston, which he says has already started to improve. “It’s a slow shift but it’s very meaningful, he says.


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Trader disclosure: On February 28, 2012 , the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders;
Terranova is long (VRTS); Terranova is long (MCD); Terranova is long (OXY); Terranova is long (IBM); Terranova is long (EMC); Terranova is long (LQD); Terranova is long (FXE); Cortes is short (XHB); Cortes is short (FXI); Cortes is short USD vs. JPY

For Brian Kelly
Fund is long (XLF)
Fund is long (GLD)
Fund is long (SLV)
Fund is long (KRE)
Fund is long (SPY)
Fund is long (TLT)

For Doug Kass
Kass is long (ETFC)
Kass is long (HD)
Kass is long (LOW)
Kass is long (XLF)
Kass is short (SPY)

For Daniel Ernst
No disclosures

For Paul Miller
No disclosures

For George Davis
RBC Capital Markets makes a market in euro and Australian dollar

For Gina Sanchez
No disclosures with wires.