Homebuilder stocks continued their rally from Monday, even though new data showed that pending home sales hit their lowest point ever in August. The National Association of Realtors said its pending home sales index fell 21.5% to a reading of 85.5 in August from a year earlier. That number was the lowest since NAR created the index in 2001. The index was down 6.5% from the upwardly revised reading of 91.4 in July. The index, which measures pending contracts of existing homes, is considered a leading indicator of the market. While the report showed that the housing market remains dismal, homebuilder stocks rose sharply -- leading some market watchers to question whether the stocks are simply enjoying a dead-cat bounce. "I'm totally confused. It doesn't mean I short them here, I just don't understand what the excitement is," says one hedge fund analyst who remains bearish on housing and has shorted the sector at times in recent months. The analyst says his trader told him people might be betting on a recovery in the builder's fundamentals within three to four quarters from now. However, given the huge inventory overhang in the sector, the analyst doubts a recovery can come that fast. Among the biggest risers were homebuilders that have been heavily shorted. Standard Pacific ( SPF) rose 9.4% to $6.05, Beazer Homes ( BZH) increased 9.4% to $9.19 and Pulte Homes ( PHM) jumped 7% to $15.83.
Meanwhile, D.R. Horton ( DHI) gained 6.6% to $14.34, Toll Brothers ( TOL) rose 6.1% to $21.91, and Lennar ( LEN) added 6.2% to $24.72. On Monday, the group rallied after Citigroup analyst Stephen Kim upgraded several stocks in the sector, saying fundamentals are not likely to recover in the near term, but the stocks themselves have hit a bottom and should benefit from a trading rally in coming months. "Timing the bottom in a volatile group like the homebuilders is never easy, and catalysts in these dark times will inevitably amount to a mere flicker," Kim wrote in his note. "However, we are not to trying to suggest that trends in the homebuilding sector are about to get much better; rather the purpose of this piece is to point out that they have never been worse. And in this sector, with its long history of feverish booms and catastrophic busts, it is precisely when things have gotten this bad that the stocks start looking good," Kim said.