Pulte Homes (PHM) was one of the major homebuilder stocks to suffer major losses during 2007, but 2008 has shown a dramatically different picture for this homebuilder stock.

On the shorter daily time frame, notice the discreet momentum divergence that proceeded the major rally.

Recall that at the birth of a new trend after a long trend has been established, the first momentum impulse is often caused by traders who are massively short, as they buy back large quantities of stock to cover their short positions. This increased momentum (and price) move also attracts “bottom fishers” who believe they are buying the stock as close to the absolute bottom as possible.

Pulte Homes above shows a classic technical set-up that describes this pattern very well.

Let’s view the weekly picture now:

Notice that there are clear signs of capitulation on the side of the sellers as we moved into 2008. Notice the massive volume numbers as the stock made newer and newer price lows.

Also, notice the massive momentum divergence with price that began occurring in September 2007 and has now been resolved with a new momentum high on the weekly chart as price has risen above the falling 20 period moving average to make new highs not seen since September.

Again, a certain percentage of the recent move is likely due to short-covering, and this could be described accurately as part of a “short-squeeze,” but I see something else going on.

According to the Sector Rotation model, Financials and Consumer Discretion (including homebuilders) have seen the most significant increase in funds over all other sectors recently, which occurs at or near potential market bottoms.

With all the bad news out in the market, it’s reassuring to see that sectors once thought destroyed are making a potential bullish recovery, which is absolutely due to the environment of lower interest rates.

How long this recovery in these sectors will last is anyone’s guess, but for now, this is a welcome bit of bullishness in a sea of overwhelming bearishness.