ANALYST: The Signal That Correctly Predicted The Homebuilder Stock Sell-Off Is Now Saying Buy

"Lumber prices and the Homebuilding Stocks have a pretty high correlation for obvious reasons," said Miller Tabak's Jonathan Krinsky in May 15 note to clients. "They generally move higher together, and lower together, over longer periods of time."

"When they start diverging, however, we should probably take notice."

At the time, Krinsky warned that the ongoing sell-off in lumber prices was signalling trouble for homebuilders.

Indeed, homebuilder stocks have tumbled since May since that prescient note.

Today, Krinsky is out with a new note titled: "Flipping Bullish on Homebuilders." From his note (emphasis added):

The S&P 500 Homebuilders index happened to peak for the year on May 15th at 695.01, and declined 36% down to its August 15th low of 443.86. Meanwhile, lumber, which had peaked on February 19th at 400.80, declined 31% down to its May 30th low of 276.20. (chart below)

What has peaked our interest of late, is that Lumber did not make a new low since May, even as the Homebuilders did. Just as the failure of Lumber in May to make a new HIGH created a "bearish" divergence, the failure of Lumber to make a new LOW has recently created a "bullish" divergence. Lumber has rallied some 20% off those May lows...

Krinsky discusses other housing indicators in his note, and he warns "the charts of many of these homebuilder names are still far from healthy."

"Even if the homebuilders are in a prolonged bear market, there appears to be an opportunity to play for a bear- market rally," he said.