The U.S. overall housing stock index saw its greatest one-day gain in five years on Monday, as shares of homebuilders soared.
Beazer Homes USA Inc., on a list of some of the most badly beaten stocks, saw hefty gains of more than 10 percent. Beazer, an Atlanta-based builder, currently has 18 housing projects underway or near completion in the Metro Nashville area, including the Hidden Creek subdivision in Antioch and Brentwood’s Brookfield Estates.
"When you see this kind of move it's because the stocks are over-shorted," said Alex Barron, an Agency Trading Group analyst.
Investors who “short stock” bet that the price of the shares will fall. They borrow the shares on the hopes that they will replace them with shares they'll purchase at a lower price.
"As soon as the stocks start to go in the opposite direction people rush to cover their gain," Barron said.
The Dow Jones U.S. Home Construction Index, a yardstick that measures homebuilder performance, rose 8.1 percent in mid-afternoon trading on Monday. Shares of Beazer Homes USA Inc. rose 98 cents, to $10.04.
Shares of Standard Pacific Corp were up nearly 16 percent, or 69 cents at $5.11. Shares of Meritage Homes Corp were up 10 percent, or $1.38 at $14.66. Hovnanian Enterprises Inc shares rose 8 percent, or 81 cents, to $11.36.
"A lot of people have made a lot of money by shorting these names and they want to protect their gain. They rush out to buy to cover their short, but then that in turn causes the stock to move up higher, and that creates a frenzy," Barron said.
Beazer, Meritage Homes and Hovnanian are all on the New York Stock Exchange's threshold securities list. That means short sellers have had trouble finding enough of the stock to borrow over the last few weeks. That makes those stocks particularly vulnerable to short covering.
The momentum also has led some investors to think the stocks have reached a bottom, experts said.
"What we are seeing today is classic value investing combined with short covering, which many times can signal market bottoms," said Tim Biggam, lead options strategist at online brokerage thinkorswim in Chicago.