No Bargains in Homebuilders

It was a cruel summer for the homebuilding sector, but it has enjoyed a solid rebound this fall. However, if you're tempted to get back into these stocks, give it a second thought. If you own them now, consider exiting positions on the current strength.

In a similar vein, U.S. regional banks provide funding for residential construction and development. Their exposures to these loans are increasing while construction is slowing -- a less-than-ideal environment for new investments in the sector.

Next year, watch for homebuilders to slide below their July lows, as they get pushed down by the popping of the real estate and housing bubbles. Meanwhile, balance sheets at financial institutions will become even more stretched, leading to a correction for regional bank stocks.

As you can see in the table below, the fundamentals for the homebuilders are showing no signs of stabilizing, assigned sell and hold ratings by ValuEngine. Fair values are well below the 52-week lows, except for D.R. Horton (DHI - commentary - Cramer's Take).

According to ValuEngine, the homebuilders are 33.9% to 90.7% overvalued. So why the rebound? Positive technicals! The weekly chart profiles show rising momentum, and my annual pivots, which failed to hold on the way down into July, are influencing the homebuilders. Annual pivots have been providing magnets since those July lows, but these levels will change in January. The negative fundamentals will eventually trump the positive technicals.

Take a look at the Philadelphia Stock Exchange Housing Sector Index, or HGX:

This index is above its 200-day simple moving average of 224.95 for the first time since April 26. If I'm correct, the weakening fundamentals will trump the technicals, and the homebuilders will resume their declines in 2007.

Financials Look Vulnerable

Quarterly data from the Federal Deposit Insurance Corp., or FDIC, show that financial institutions have increased real-estate exposure. At the end of the third quarter, there were 8,743 FDIC-insured institutions, and only 7% were publicly traded companies. Net income peaked in the second quarter, as net interest margins declined to a 17-year low.

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Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.