Homebuilder Downgrades Cloud Earnings

NEW YORK ( TheStreet) -- Homebuilder stocks have set tradable ranges since the PHLX Housing Sector Index ( HGX) (195.73) set a multi-year high at 198.06 on March 20 the day after I wrote, Sell Downgrades Weaken Homebuilder Foundations.

From that high to the April 18 low of 174.43, HGX fell a quick 11.9%. On that day I wrote Homebuilder Upgrades Fortify Potential Sinkholes and provided fresh buy-and-trade parameters for the homebuilders I have been covering. On Monday HGX set a new multi-year high at $198.33, up a solid 13.7% from the April 18 low.

On March 19 I viewed the construction sector as a "source of funds" then upgraded the sector to underweight on April 18 with new buy-and-trade strategies. Today it's time to book gains on these trades.

The construction sector is the most overvalued sector at 17.9% overvalued. Of the 160 stocks in the sector there are 54 rated sell and 28 rated strong sell. With 51.2% of all stocks in the sector rated sell the sector still has an underweight rating.

Helping the sector has been better than expected earnings from D R Horton ( DHI), KB Home ( KBH), Lennar ( LEN), PulteGroup ( PHM) and Ryland Group ( RYL) with two more reporting quarterly results this week.

Last week we learned that new home sales rose 1.5% in March to a seasonally adjusted annual rate of 417,000. The National Association of Home Builders described this report as getting half-way back to a normal housing market.

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