Will New Highs in Homebuilders Tempt Traders Off Sidelines?

A new short-term high in the SPDR Homebuilder ETF (NYSE: XHB) has financial pundits and prognosticators beginning to anticipate (again) an end to the bear market in the housing market. Shares of XHB rallied by well over 3% in Thursday’s trading to finish at their highest closing level not just in the past few weeks, but since July, as well.

More importantly, the rally in XHB comes in the wake of a three-day pullback which, on the third day, took the ETF into oversold territory above the 200-day moving average. Seen this way, not only is the rally in XHB not surprising, but also it puts the new, short-term highs in the context of a trade that is already near its end for those traders who prefer to buy weakness and sell strength, rather than the other way around.

Note that XHB is only recently back in bull market territory. The fund spent the months from late July to December trading below its 200-day moving average, where short-term rallies were met more often by selling than by additional buying. If the fund continues to trade on the bullish side of the 200-day, then traders will be likely to continue focusing on buyable weakness and sellable strength heading into 2012.

The rally in XHB was mirrored by big moves in component stocks like Ryland Group (NYSE: RYL). Shares of RYL had sold-off for four days in a row, becoming increasingly oversold before bolting higher by more than 4% on Thursday. The same was true of Lennar Corp (NYSE: LEN), which also pulled back for four days in a row before buyers rushed in to bid the stock higher. (LEN gained more than 4%.) D.R. Horton (NYSE: DHI) and Toll Brothers (NYSE: TOL) are further examples of the herd mentality in the sector over the past few days, as traders and active investors have been uniformly attracted back to the market for homebuilders stocks as buyers here in the second half of the week.

With all the stocks in the sector moving higher ahead of trading on Friday, the next set of edges in this group are likely to be negative as additional buying pushes these stocks – and XHB – into overbought territory. Then expect those traders who eagerly have been bidding shares higher to revert to sellers with equal speed, if only in the short term.

The stocks and ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.

David Penn is Editor in Chief of TradingMarkets.com