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 7% of its value since Dec. 31, yet delivery services -- UPS (NYSE: UPS) and FedEx (NYSE: FDX), for example -- are back in black following lows set earlier in the year.

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Stocks in the same sector have a tendency to move in tandem, regardless of overall market conditions. After all, they usually get their revenue from similar sources, and they're similarly affected by 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 say about these stocks.

Third time's a charm?
Perhaps we should have taken notice in January and maybe taken February more seriously, because Home Construction is, for the third time this year, the hottest sector of the week, up an astounding 11.8% in the past five days. This group includes:

Has it finally hit bottom?
After losing nearly half of its value in 2007, the SPDR S&P Homebuilders exchange-traded fund is up 25% year to date, despite a mixed bag of housing data that hasn't exactly signaled a full-on real estate rebound.   

This week's surge can be partially attributed to an agreement by Congress to move ahead with a housing bill that may actually end up helping the homebuilders more than struggling homeowners. The $15 billion Foreclosure Prevention Act of 2008 would provide homebuilders with $6 billion in tax breaks to help them offset losses this year and in 2009. There's $4 billion earmarked for local governments to buy and refurbish foreclosed houses, as well as a $7,000 tax credit for people who buy foreclosures. There's also help for individuals refinancing subprime mortgages. However, according to the Laborers International Union of North America, this bill could also provide substantial refunds to homebuilders, with estimates of up to $573 million for Lennar and up to $607 million for D.R. Horton.

Without getting mired in questions regarding the fairness of government-sponsored bailouts, let's instead focus on what members of the 95,000-person CAPS community are saying about homebuilders following recent events.

As the table above shows, homebuilders are still largely unloved by CAPS investors. But some players, like PatienceGrasshpr, have recently noted that the housing debacle already seems to be priced into the market: "When even bad news makes housing stocks go up, you know they've hit bottom."

Some, however, like CAPS all-star floridabuilder, still don't believe the hype. In his recent blog post following Lennar's earnings report, floridabuilder explained why this homebuilder rally might be a run-of-the-mill dead-cat bounce:

Investors are not trained to understand cashflow, balance sheet, and backlogs/future sales. This is why investors piling into builders are not getting it ... [T]hey think they are catching the bottom because LEN's miss was to the positive side (earnings) and talking heads are saying the bottom is in (recent analysts upgrades) fundamentals. Builders and Financial stocks are a different ballgame today. [Y]ou better know the new rules of investing when looking at these stocks.

Investment guru Sir John Templeton once said, "The time of maximum pessimism is the best time to buy." Was January such a point for homebuilders, or have we not yet gotten to that point? Voice your opinion on Motley Fool CAPS, where more than 95,000 investors are waiting to hear what you have to say. It's 100% free.