Making bullish bets on homebuilders is the financial equivalent of playing Russian Roulette. Every time there appears to be some type of floor, the foundation comes crashing to new lows. In many ways, buying the sector is like watching that very underrated Tom Hanks film, "The Money Pit."
For those who haven't seen it, a quick summary: Hanks and Shelly Long move to the suburbs and buy what they think is a steel of a deal, an old Colonial house in Connecticut. But as soon as they move in, they begin to notice the flaws, and before you know it, they're pouring tons of cash into a massive makeover - a not entirely dissimilar fate for investors in the homebuilder E-T-F (XHB).
And yet today, we saw heavy call buying at the June 12 strike, with over 90,000 contracts having traded hands.
According to "Options Action" star Stacey Gilbert, the action continues a bullish pattern of late for what has been a very bearish sector of long.
"In the past two weeks ago we have seen predominately call buyers in the (XHB), with a particular focus on the April 9 calls," said Gilbert.
Could a floor be building?
The homebuilders as a whole are trading at a discount to their book value, a level some see as historically cheap.
"Right now the sector is trading close to 70% of book value," said Megan McGrath, who rates the sector "Positive" for Barclay's Capital. "Typically, when the sector gets to that level, it tends to find a floor."
Wondering how "The Money Pit" ends? They live happily ever after.
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