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This Sector Is Ready to BounceBy Jeff ClarkThursday, July 15, 2010 Housing stocks will outperform the rest of the stock market over the next month.
OK, stop laughing. I'm serious.
Yes, I know the housing market is in miserable shape. Prices keep falling. Inventories of unsold homes keep rising. The government no longer offers an incentive for new-home purchases. And housing starts are at the lowest level ever recorded.
That explains why the average housing stock is down 30% over the past two months.
Granted, the housing sector was trading at premium prices back in May… Investors had lost their minds and were expecting dramatic results from the government's tax-credit program. Now, however, investors have gone to the other end of the spectrum and are discounting the worst of all worlds.
Think about it. Is there anybody, anywhere who's expecting good news from the housing sector?
There's no fundamental argument here. The housing sector is in bad shape, and we're a long way from seeing any sort of growth in that business. My argument is purely technical.
Housing stocks are viciously oversold. And sentiment toward the sector is as bearish as it has ever been. It's usually in this sort of overwhelmingly pessimistic environment that stocks experience the largest oversold bounce.
Just look at what happened yesterday…
Goldman Sachs downgraded the sector, yet all of the stocks held above their recent lows. It may not seem like that big a deal. But when the biggest gorilla on Wall Street pounds his chest and investors shrug it off, a bottom must be close at hand.
This chart of DR Horton (DHI), one of the nation's largest homebuilders, supports my case…
 The decline in the share price over the past two months has created a falling-wedge formation. Stocks usually break to the upside of this pattern and often recover at least 50% of the price decline.
DHI and all the other housing stocks broke out of their chart patterns last week. So even though the broad stock market looks ready to pull back from its recent rally, the bounce in the housing sector is just getting started.
Best regards and good trading,
Jeff Clark
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