It’s a Sign of Speculation

Home prices are falling…still. Demand is weak… still.

So you’d expect homebuilder share prices to be trolling the bottom… still. Right?

Not so fast. This chart below shows the recovery of homebuilders since the recent rally began on October 4, 2011.

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You can see the S&P500 is up 25% during this time. But share prices of the major homebuilders are up between 60% and 140%!

This can mean one of two things.

Homebuilders have made major adjustments. They have written-down inventory and reduced overhead costs, like wages. Some call it “right-sizing.”’ We call it deflation. These adjustments could have put homebuilders in a much stronger position to be profitable, even in this “new economy” and anemic housing market.

It’s possible. But not probable.

More likely, the outperformance of homebuilder stocks is a sign of speculation. Investors – from Wall Street to Main Street – are yearnrning for “the bottom.”

Eager anticipation of a housing recovery will cause these stocks to be bid up.

But this is NOT the bottom. So watch for these stocks to crack again. One of them is already showing signs of weakness.

The next chart starts in January 2011, when homebuilder stocks last peaked. Four homebuilders have broken well above those highs: Lennar (+45%), DR Horton (+29%), Toll Brothers (+29%) and PulteGroup (+18%).

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The laggard is KB Home, which is still 33% lower than January highs. It’ll have company… soon.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.