Sell Homebuilders After Foolish Rise On The HMI

| About: SPDR Homebuilders (XHB)

Homebuilders were on the move higher Tuesday, with the SPDR S&P Homebuilders (NYSE: XHB) gaining 0.6%. The misplaced catalyst for the group arrived from the National Association of Homebuilders (NAHB), which published its Housing Market Index.

Builder confidence gained in May, and the shares of major public builders Toll Brothers (NYSE: TOL), K.B. Home (NYSE: KBH), Ryland Group (NYSE: RYL), PulteGroup (NYSE: PHM), Lennar (NYSE: LEN), NVR (NYSE: NVR), D.R. Horton (NYSE: DHI) and MDC Holdings (NYSE: MDC) were up between 1% and 3%. Penny stock, Hovnanian (NYSE: HOV), gained 10% on its small basis. Despite the excitement, I believe investors in the high-beta group should take profits and avoid these stocks into what should be an increasingly distressed macro-driven market unraveling.

The NAHB's Housing Market Index (HMI) showed builder confidence increased, with the index gaining five points to a mark of 29 in May. Followers of the data point will recall the impact it has had over the last few months. After beginning a rise and satisfying the palette of industry interests earlier this year, the index retraced ground last month, dropping to 24 (revised this month from 25). The falloff was deflating for those hoping 2012 would offer the springboard season to recovery.

For those people, this month's data sort of restored their faith, based on the day's trading. But I'm telling you it is misplaced, and I say it even despite my understanding of the structural changes that have occurred to the housing industry. I've written about the important market share gains the big builders garnered after the bubble burst. I've stated why they have been first to see operational improvement and a pick up in orders. The better funded publicly traded large builders have that advantage, and it supports their shares, but they remain operators within a cyclical industry. My view of the cycle today in a dynamic global environment full of special risks with high probability of a bad scenario playing out is what leads me away.

I'll remind readers again that while the qualitative sentiment measure indicates improvement, it still reflects a depressed general state of affairs while deeply below its 50 threshold. Also, the component indices rose only to still sad points, with current sales conditions and prospective buyer traffic up to 30 and 23, respectively. Please take note of the two keywords in that last sentence, "conditions" and "prospective". Neither reflects tangible operational gains; rather, they indicate a more fertile environment for gains. Perhaps ground is also fertile when a flooding river is just a short distance away from overrunning it.

The NAHB report also showed that hope abounds again, with sales expectations for the next six months up three points to a mark of 34. Again, that's 16 points short of the point where the majority of builders would be considered truly hopeful. Regional improvement was seen in the Northeast, Midwest and South, while each of those sat in depressed territory along with a sinking West.

Yet, the XHB has not given back much ground. At its Tuesday close of $21.23, it was just 5.3% off its 52-week high. From October 3, 2011, the point of inflection for stocks generally, the XHB is up 70%, after adjustment for dividends and splits. The chart is showing me a tired trend though, and Europe, China and the United States are showing me economic bend. Given that higher beta shares will exaggerate the market's movements, I would reconsider positions in homebuilders of any sort now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.