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Dr. Duru, One-Twenty Two (112 clicks)
Long/short equity, event-driven, homebuilders, currencies
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The SPDR S&P Homebuilders ETF (XHB) has remained amazingly resilient during the stock market's latest rendition of the "sell-in-May" swoon. XHB is only down 3.4% this month while the S&P 500 has dropped 6.1% in one of the index's worst performances in May since 1950. XHB is also still hovering just below 4-year highs as it tries to hang onto its third "recovery run" since the recession ended.

(click to enlarge)The Homebuilders ETF remains strong this year

The Homebuilders ETF remains strong this year

Source: FreeStockCharts.com

I believe this trading action is consistent with my on-going thesis that the housing industry as a whole will finally reach a bottom in 2013. Unfortunately, instead of keeping things simple and buying this index, I decided to go for what I determined was an undervalued stock in KB Home (KBH). KBH had a surprisingly strong performance to start the year: it almost doubled in just 2 1/2 months. It has since lost all those gains and continues to fall further behind XHB in relative performance.

(click to enlarge)KBH is falling further behind XHB

KBH is falling further behind XHB

Source: Stockcharts.com

I still think this is now a great spot to start building a position in KBH, but going forward I will be buying the dips in XHB, rather than expanding my latest position in KBH.

Be careful out there!

Source: KB Home Falls Further Behind The Homebuilders ETF