At the end of the day, I'm looking for (i) companies that fit within my Comfort Zone, which happen to be those listed in the Cara Global Best 100 Companies, and my Accumulation or Distribution Zone, which happens to be a simple analysis of Relative Strength.

You see, when it comes to share prices, I believe in the concept called Reversion to the Mean (also called Regression to the Mean). Share prices have motion, like gravity, but that motion depends on time and space that is altered by factors that are greater than merely the physical. When I comes to share prices, we are also dealing with the mental and emotional.

Isn't this fun?

Today, I want to expand a little on my use of Relative Strength Index as a technical indicator. We can apply it to the study of the U.S. home-builder industry.

Before I go further, you should know that of all the companies in all the industries in all the world, I have selected two U.S. home-builders: Hovnanian Enterprises (NYSE: HOV) and TOLL Brothers (NYSE: TOL) as Cara 100 components.

GICS 25 Hovnanian Enterprises (HOV) (HOV) Financial Data

GICS 25 Toll Brothers, Inc. (TOL) (TOL) Financial Data

Note that I did not put these stocks into the Financial sector (GICS 40), but the Consumer Discretionary sector (GICS 25) instead. That's because people buy houses when they are flush, not when they have to or when banks are strong, etc.

Next, I happen to like hands-on management by owner-operators if I can find such enterprises. These people don't quit their jobs because a head-hunter waves an impressive number from a competitive company. They build their own enterprise for a lifetime, and public shareholders get to go along for the ride.

Better still, we get to go along for the ride as long as we think it serves our interest, which is our personal investment portfolios. We hold the unfair advantage because the Hovnanians and Tolls do not have that opportunity. When they choose to sell and buy, they must file a lot of information forms with regulators, which we get to see, and we do not have to file.

So we get to see their cards, and they don't see ours. It's kind of the banker game in reverse.

So there are times when the RSI technical indicator is telling me there is a Distribution Zone, which was last July. This June, these stocks have dropped down -- on average about -50 pct " into the Cara Accumulation Zone.

Is it time to buy? That depends on your time horizon, so there are different answers. If you are a day trader, I say you buy for a one or two week trade on days of extreme weakness. But you wait t see the Hourly RSI turn positive for the Hoime-Builders across the board.

A positive RSI reading for short-term traders is when on the Hourly data charts the RSI 7 (7 period) moves higher and intersects i.e., crosses upward through, the RSI 14 line.

When that happens to several of the same industry stocks, you can figure on a winning trade. You can figure so, but never count on it. RSI is an indicator. Sometimes indicators indicate wrong.

But mostly the RSI and the MACD are indicators that once you catch onto the nuances are fairly accurate, particularly when used in analysis of the data across the industry and across the time spectrum.

As to the later, you would like to see commonality of a turn upward in RSI across the Hourly, Daily, Weekly and Monthly data simultaneously. That is the time I call, in my so-called "headline" articles, for the moonshot, and you get to read about the results some time soon.

But if the RSI on the Hourly is turning north and the RSI on the Monthly and Weekly is in the fast elevator going down, then prudence is warranted. You can't swim against the stream and expect to make much progress.

So as RSI applies to the U.S. Home-Builders, the Monthly, Weekly and Daily data seems to be quite extended on the downside. The conditions are right for a rally in this industry group.

Besides the fundamental data is strong, and the quant data is strong too. Look at the PE's of 4 and 5 for the Cara 100 home-builders. Look at the balance sheets. Look at management's past performance results in terms of Returns on Equity and so forth.

Why traders are holding back, of course, is related to the credit crunch, signs of economic softness, lack of pricing power as inventories of new and used hoes builds, and so forth.

These are legit concerns. But last July, when the RSI's were all in the 80's and 90's, things were wonderful then, and what happens after "wonderful" is almost always disappointment. That's the way markets work.

But what happens in the business and market cycles after things look dismal is that they almost always look better. And that's the time to start accumulating.

In terms of the house-builders product, people will always want it. So if you stick to shares of companies that are strong and will be sticking around for the good times, you buy them when things look dismal. And that's because you are always looking ahead.

So, as for me, I'm looking ahead to a severe equity market shake-out. If so, one of the drivers will likely be rising interest rates or at the least liquidity issues. These are factors that will likely drive the share prices of the home-builders lower " to a point they become even more over-sold.

There will be a time soon " because we are in the Accumulation one " when buying does make sense. Wait for it. The RSI numbers will show it. There is no need to out-think the market. Let the market come to you.

Because of this over-sold situation I expect to see this group of stocks to be among the leaders of the next bull market.

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Home-Builder RSI analysis:

Home-Builder Monthly data charts: