Have The Homebuilders Bottomed?: LEN, MTH, SPY, TOL, XHB

I'm not sure why no one has been talking about it, but the homebuilders have experienced a spectacular rally over the past several months. Before we go further, I want to clarify that we are discussing homebuilders as a sector and not housing or the real estate industry in this article. Often, market participants have a hard time differentiating the two, and there are several reasons that homebuilders can do well, or at least better than expected, despite the fact that home prices remain depressed. Regardless of the reason, it is clear that the group has been moving.

The recent rally is quite apparent in the chart for the SPDR Series Trust SPDR Homebuilder (NYSE:XHB) ETF as it rose from near $12 to almost $19 per share. Looking at the much longer trend, XHB appears to have broken their downtrend in late 2009 and have been consolidating since then. XHB has been trading in a range roughly between $19 and $13. XHB may not be ready to truly breakout yet, but the recent strength revealed significant strength.

While the general markets have also being going higher for much of the same time, XHB has actually been outperforming them. Notice the relative strength chart below that is displaying a ratio of XHB versus the SPDR S&P 500 (NYSE:SPY) ETF. While XHB and SPY mostly moved together from July 2010 through July 2011, they decoupled last year. After a period of sharp underperformance, the ratio has been skewed in XHB's favor since October of last year. Many individual stocks have been performing even better.

Lennar Corporation (NYSE:LEN), for instance, has almost doubled in that time frame. LEN cleared a significant resistance level near $18 in November and hasn't looked back. The long-term chart looks very similar to XHB and it's quite possible that a long-term bottom has been seen in the stock. That being said, LEN is far too extended for initiating a new position. The stock is likely due for a correction soon, after such a strong rally with only a brief pullback in November 2011.

LEN isn't the only individual name with an outsized move. Toll Brothers Inc. (NYSE:TOL) actually hit a new bear market low last October, but rather than a meltdown, market participants rushed into the stock. TOL then proceeded to almost double in price, much like LEN.

The story is the same for many other homebuilders such as Meritage Homes Corporation (NYSE:MTH). After clearing resistance late in 2011, the stock skyrocketed higher and remains near recent highs.

The Bottom Line
As powerful as these stocks have been, I would recommend traders stay away for now. These stocks are much extended and are likely due for a pullback. However, I don't view them as shorting opportunities either because they have shown great relative strength recently. That can't be ignored and it's possible that this group is finally swinging back into favor. So why bring up a group that I don't think is worth buying or selling? It's possible that after a correction or consolidation, this group will present a great opportunity to buy near support. Something is brewing in this group and so far the signs are very clear that someone is buying up this sector.