This Week's Hottest Sector

Newton's law of inertia doesn't always work in the stock market. For example, the S&P 500 index has lost about 6% of its value since Dec. 31, yet retail companies -- for example, TJX (NYSE:TJX) and J.C. Penney (NYSE:JCP) -- are in the green.

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Stocks in the same sector have a tendency to move in tandem, regardless of overall market conditions. After all, stocks in the same industry generally derive their revenue from similar sources, and they're 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.com's Sector Tracker. Then we'll cross-reference the individual equities against investor data on Motley Fool CAPS, the Fool's free investing community. CAPS can give us a better feel for what both individual and institutional investors are saying about these stocks.

A surprising sector
This week's top sector is "Home Construction," up 9.7% over the past five days. This group includes:

Sources: Smartmoney.com's Sector Tracker, Yahoo! Finance, and Motley Fool CAPS as of Feb. 27.

Is housing finally gaining traction?
The home-construction sector has now been the hottest sector in two of the past five weeks. Could this recent upswing finally mean we've hit the trough in the beaten-down sector?

One of the factors that drove homebuilders up this week -- particularly those that rely on volume production, as D.R. Horton (NYSE:DHI) does -- was the recent report from Standard & Poor's, showing the steepest decline in housing prices in 20 years. That news could be tempting buyers back to the market. Similar data led fellow Fool Marko Djuranovic to argue that housing prices are nearing a bottom.

This news, combined with a federal economic stimulus package that will raise the conforming mortgage limit from $417,000  to $729,750 in select metropolitan areas, could further stimulate demand in those regions.   

Over on CAPS, investors are flocking to the well-respected blog of CAPS player floridabuilder, who not only happens to be one of the highest-rated players in CAPS, but also frequently provides tremendous insight into the housing/construction market.

For example, in a Feb. 17 blog post, floridabuilder argued that investors should be prepared to jump on homebuilders soon:

[W]e are seeing a relatively weak spring selling season and it will be game over for another round of private builders. 2009 will be better than 2008 for the surviving builders. We need to strike when the iron is hot at maximum panic. I truly believe once the financials start rolling out pre-earnings and earnings another round of massive write offs in the 1st and 2nd quarter it is going to provide us the cover to buy in at a deep discount again. [Emphasis in the original.]

This week, he posted a valuation of Hovnanian and other homebuilders, and he discussed the Lennar buyout rumor at length.

I'm sticking with my advice from last month. 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. Homework is always a must before buying a stock, but extra due diligence is necessary when dealing with any beaten-down sector. After all, you don't want to end up buying the dud in a turnaround sector.

Floridabuilder's CAPS blog is a great place to begin gathering information -- you can access it for free by heading to CAPS.

What do you think? Was this week's surge the catalyst that will send homebuilders back up? Voice your opinion on Motley Fool CAPS, where more than 84,000 investors are waiting to hear what you have to say. It's 100% free to get started.  

For more hot stocks, visit Fired-Up February.