For the second consecutive day, stocks of the large public home building companies were up sharply as the overall market continued to sink, signaling to some that the stocks may have found a bottom, at least temporarily.

In midday trading, the Dow Jones industrial average was down 1.22% to $11,825.68, but the S&P home builders ETF (AMEX:XHB) was up 3.18% to $19.14. Among the group, Lennar (NYSE:LEN), which was scheduled to report earnings at market close on Wednesday, was up 9.28% to $14.37. Meritage (NYSE:MTH) was up 16.05% to $9.98 on top of a near 10% gain on Tuesday; Hovnanian (NYSE:HOV) was up 15.09% to $7.54, adding to an 8% Tuesday gain; Beazer (NYSE:BZH) was up 10.35% to $6.29; Brookfield (NYSE:BHS) was up 9.87% to $12.25; Standard Pacific (NYSE:SPF) was up 15.21% to $2.50; and Centex (NYSE:CTX) was up 8.25% to $24.54. Toll Brothers (NYSE:TOL) also was up 8.62% to $19.65, and Pulte (NYSE:PHM) was up 10.8% to $11.90, adding to a 7.4% gain on Tuesday. KB Home (NYSE:KBH) rose 8.11% to $21.74, on top of an 8.6% Tuesday gain, and D.R. Horton (NYSE:DHI) was up 7.36% to $13.85.

Stephen East, home building analyst with Pali Research, is one oberserver who believes there is something to this rally. In a research note, he said, "We believe yesterday's action was primarily driven by short covering in the group as the builders still have significant short interest. However, while today's move likely still has short covering embedded in it, we also believe there is a broader bent to it."

He added, "Given the high short interest in the group and particularly in names such as BZH, SPF, HOV, MTH and LEN, expect the move to be exaggerated in the short run. However, if The Fed provides a few more opportunities in the way of rate cuts, expect the broader move to be sustained despite continued dreary fundamentals."