Homebuilders, of course, love the quasi-private, quasi-government agencies, Fannie Mae and Freddie Mac. When they make credit available to homebuyers, homebuilders get the green light to break ground on new construction. And naturally, revenue and profits follow.

Homebuilder stocks staged a recovery from their 2009 bottom fairly late in the game. Making little progress through 2009 and 2010, they got oversold in late 2011 and made bullish breaks of prior highs in early 2012. From there, the rally was on.

Here’s a chart showing the performance of homebuilder stocks (XHB).

See larger image

XHB was up 53% in 2012 and added another 25% gain in 2013.

But now, homebuilder stocks look to be overextended. Since late 2012, the Relative Strength Index (RSI) has been trending downward, while the price of XHB has continued to trend higher.

That mismatch is called Negative Divergence. And it’s a sign that the strength in homebuilder stocks may be waning.

I’m keeping a close eye on this trend. For now, I recommend steering clear of homebuilder stocks as they’re due for a correction.

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.