This Week's Hottest Sector

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Newton's law of inertia doesn't always work in the stock market. For example, since Dec. 31, the S&P 500 index has lost about 9% of its value, yet oddly enough, retailers like VF Corp (NYSE: VFC) and TJX Companies (NYSE: TJX) have been on a hot streak.

Insert dovetail here
Stocks in the same sector, like the two companies mentioned, have a tendency to move in tandem, regardless of overall market conditions. After all, stocks in the same industry generally derive their revenues from similar sources and are similarly affected by news, legislation, or events.

Each week, we'll take a look at the hottest sector over the past five days according to SmartMoney's online "Sector Tracker," and then cross-reference the individual equities against investor data on Motley Fool CAPS, the Fool's free investing community. Using CAPS, we can get a better feel for what both individual and institutional investors are saying about these stocks.

A surprising sector
This week's top sector, believe it or not, is home construction, which is up 24% in the last five trading days. This group includes:

Company	5-Day Price Change	CAPS Rating (out of 5)
Pulte Homes (NYSE: PHM)	39.02%	*
Meritage Homes (NYSE: MTH)	33.75%	**
Centex (NYSE: CTX)	32.59%	*
MDC Holdings (NYSE: MDC)	27.56%	**
KB Home (NYSE: KBH)	26.20%	*

Sources: Smartmoney.com "Sector Tracker" and Motley Fool CAPS as of Jan. 23.

Light at the end of the tunnel?
Not surprisingly, CAPS investors' sentiments toward homebuilders are very bearish. With the avalanche of declining housing prices, the "subprime slime" mess, and microeconomics working against them, you can see why investors are worried about the present state of major homebuilders.

So what gave homebuilders the boost this week amid the blood in the streets? The double whammy of rising mortgage applications and the Fed's interest rate cut gave hope to one of the most beaten-down sectors of the past year. Naturally, short interest is high on many of these stocks, so this week's good news may have forced some of them to cover their positions, thus giving more fuel to the homebuilders' surge.

Despite the generally bearish sentiment, there are fervent homebuilder bulls on CAPS, including player tuffsledding, who said last July that he was accumulating shares of homebuilders:

This is a long-term play, may not pan out for a while, but I think the homebuilder stocks are beaten down out of proportion to their long-term value. ... The market is giving us a nice buying opportunity here. In real life, I will be dipping my toes in a bit at a time, 'cause I can't tell for sure this is the bottom, but buying when there is blood in the streets and everyone else is selling is the time-honored recipe for great long-term returns.

In this Fool's opinion, though, you should heed the advice of the 82,000-person-strong CAPS investor community as a sign to do extra homework before buying these stocks. Homebuilders might indeed turn out to be the stocks we all wish we had bought in 2008, but some are better turnaround candidates than others.

What do you think? Was this week's positive news the catalyst that will send homebuilders back up?  Voice your opinion on Motley Fool CAPS, where 82,000 investors are waiting to hear what you have to say. Just click here to get started. CAPS is 100% free.