I love overextended markets. Barring a few caveats, markets that have gone far too high, for far too long, are great… they’re the closest thing to a sure bet that traders ever see.

It goes back to a truism that resonates with my own zen-like approach to the markets: “If something cannot go on forever, it will stop.” This is Herbert Stein’s law. Said another way, “the trend is your friend… until it ends.”

Our historical analysis of bubble-bust markets shows that prices nearly always return to where they started, to “pre-bubble” prices. That makes forecasting the direction of future prices pretty easy.

Of course, there’s no free lunch in the markets… the difficult part is the timing. Who determines the upper price limit of a “bubble” market? That’s a level you simply can’t know in advance. It’s also difficult to say exactly when the gig will be up.

Simply put: bubble markets can stay overextended far further, for far longer, than most expect.

Homebuilder stocks look to be in bubble territory now. They’ve had a record run that began in September 2011. But this trend may be about to end, my friend.

Below are three separate charts that track the percentage-changes of about 15 homebuilders stocks. The three views cover three different time periods. The first shows the long-term perspective – Sept. 2011 to present. The second chart shows 2013 year-to-date prices. And the third chart is a short-term view, going back to just March 15.

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See larger image

See larger image

When you look at these three charts, you’re looking at a 30,000-foot view of the long-, medium- and short-term trends.

The long-term trend has been up. That should be obvious, with all 15 homebuilders enjoying gains ranging from 32% to 320%.

The medium-term trend (from January 1 to present) is a mixed bag. Roughly half the homebuilders are positive YTD, the other half are underwater. Price moves range from -22% to + 29%.

The short-term trend is mostly negative. I see two homebuilder stocks that are above 0% since March 15, but most are negative. One homebuilder has lost nearly 14% in just the last two weeks.

Seeing this progression… it should be clear that change is in the air. This could well be the beginning of the end for the homebuilder “recovery.”

I’ve just recommended a very strategic short-sell position to Boom & Bust subscribers. We’re already up 10% on the play in a very short amount of time. Which reminds me – stocks typically drop much faster than they climb. Timing is that much more important on the short side.

I’m using tactical money management tools in case the bubble euphoria presses on. But if I’m right… if this is the end game for homebuilder stocks… there’s a lot of money to be made on the drop!

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Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.