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The July 27 battle in housing stocks is a preview for rising volatility across the market in the days ahead

posted on July 27, 2009 at 5:51 pm

It’s going to be one bloody battle.

Bulls are bidding up the shares of home builders on reports that U.S. new home sales climbed 11% in June. That’s the biggest jump in eight years.

Last week,before the news, short sellers had been loading up on these shares betting that the sales would’t increase or that if they did they wouldn’t continue to increase and that shares will plunge. (Short sellers make money by borrowing shares from other investors, selling them, and then buying shares at a lower price to replace those they’ve borrowed.)

Round one goes to the bulls. The Philadelphia Stock Exchange HousingSector index climbed 3% yesterday and individual home builder stocks soared. Centex (CTX) climbed 9.12% on the day and Pulte Homes moved up 8.62%.

This is exactly the kind of huge volatility that results when bulls and shorts lock horns. And it’s the kind of voilatility that investors are likely to see more of in coming weeks across the stock market as investors bet with their cash on whether this rally will keep on chugging or go down in flames. You can get a sense of that wider battle to come by looking at yesterday’s housing skirmish. Read more

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