Market Leaders: You Won't Believe Them

So we have come to this: forget financials, forget materials, forget energy. Our market leaders are retailers and home builders.

Since the July bottom, the Philadelphia Stock Exchange Housing Sector Index is up 43 percent, while the S&P Retail Index is up 31 percent. All this, while the S&P 500 is up 3.3 percent.

Huh? Aren't consumers hurting? Isn't housing the root of all our problems? Yes and yes.

But, today Goldman added DR Hortonto its Conviction Buy List, saying "New and existing home sales data reported at the end of the month as well as the Case-Shiller home price index have been providing more encouraging signs as of late."

This is, to say the least, a somewhat optimistic reading of the home numbers. Signs of a bottom are still murk, and most traders feel the way JP Morgan's analyst feels: "we believe this depressed sales pace will keep inventory levels elevated through at least the next 2-3 quarters, and should result in further pressure on home prices, driving further large impairment charges for the builders."

As for retailers, they are historically early cycle plays. It works like this: historically, when EPS moves to new lows, P/E multiples start moving up in anticipation of a recovery. It's that simple. Oh, one other fact: short interest in retailers are at historic highs, so there is plenty of room for short covering.

The problem here: both of these groups are trading like there will be some kind of clear bottom in the next quarter or so. Big assumption.

A note on Lehman. While Lehman'scommon stock remains weak today, down 40 percent to $4.35, the preferred shares are not down nearly as much. The Lehman J Shares (7.95 percent, par $25), for example, traded as low as $5.12 earlier this morning (down about 40 percent), but is now at $7.85, down 10 percent.

Why is the preferred holding and the common is not? Speculation that Lehman may be taken out: traders note that the common might sell at distressed levels in a takeover, but buyers of the preffered may be made whole in the event of a takeover.


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