Market Report: Short traders caught out by housebuilder rally

Barratt Developments and Redrow shone yesterday as traders cited short closing across the housebuilding sector. Barratt was up almost 12 per cent, or 9.75p, at 93.5p, while Redrow gained more than 16 per cent, or 22.25p, to close at 158p.

In recent months, both companies have been hit by concerns about the slowing property market. But a positive note on the sector from UBS and better-than-expected earnings figures from Wall Street banks sparked a rally last week, which traders said was causing a "bear squeeze" – forcing short sellers who bet on falling share prices to close their positions.

"The whole sector has been hammered by bad sentiment and bad news. But now some people are looking at the valuations and thinking maybe it is time to dip back in. The fact that banking has bounced has helped that feeling," said one trader, who qualified his remark by adding that the rally might end as the effect of short covering wore off.

According to Data Explorers, 21.22 per cent of Barratt and 17 per cent of Redrow stock is out on loan, while 15.65 per cent of Taylor Wimpey, which gained 7 per cent, or 3.25p, to close at 48.5p, is out on loan. For Persimmon, which added 6.24 per cent, or 21p, to close at 357.5p, the figure is 28.91 per cent.

Bellway missed out on the rally, ending down 7.5p at 594.5p, after it said that despite its interim management statement last month, it would issue a trading statement in August. The news was greeted with concern as traders speculated about the content of the update. Sources close to the company, however, advised against a negative interpretation, and said nothing "dramatic" was expected.

Overall, the FTSE 100 gained 27.9 points to finish at 5,404.3 as it climbed out of bear-market territory. The London benchmark was powered by the mining and the oil and gas sectors, which drew strength from firmer commodities prices. Real estate stocks also contributed to the increase.

The sector was cheered by news of a 160p-per-share bid from Limitless, a unit of the Dubai World sovereign wealth fund, for Minerva, the small cap property group, which gained 48p to close at 120p last night. Hopes of similar deals in the wider sector took Land Securities to second place on the FTSE 100, up 5.82 per cent, or 69p, at 1255p. British Land was up 24.5p at 701p and Hammerson gained 30.5p to close at 926p.

HBOS was the weakest stock on the FTSE 100, falling 17.5p to 264.5p, after the mortgage lender said only 8.29 per cent of its shareholders had taken up their rights in its £4bn rights issue. Later, HBOS said its bankers had sold about 30 per cent of the new shares on offer during a placing of leftover stock.

The rest of the sector was cheered by better-than-expected second-quarter earnings figures from Bank of America and by close of play, Royal Bank of Scotland was up 5.4p 203p, Barclays had gained 3.75p to finish on 324p, and Standard Chartered was up 21p at 1,563p.

Also on the upside, the defence and aerospace group Cobham gained 2.3p to reach 201p after UBS analysts moved its stock from "neutral" to "buy", citing the recent weakness in its share price and the source of the company's earnings. "Cobham is reliant on government and related parties for the majority of its earnings," the broker said in a note. "This gives it a defensive source of earnings, which is something we find attractive in this market environment."

The FTSE 250 also rose, gaining 80.8 points to close at 9,045.5. Detica, the business and technology consultant, advanced by 32.51 per cent, or 98.5p, to close at 401.5p as the market digested news of a takeover approach. The company said it had received a preliminary enquiry after the market closed on Friday and last night.

Detica did not name the suitor, but traders cited speculation pegging BAE Systems as the most likely predator. Reacting to the news, Dresdner Kleinwort upgraded the stock from "hold" to "buy", noting that a take-out price of 413p could be achieved, or "more if a competitive bidding situation evolves".

Landsbanki, whose analysts maintained their "hold" rating, also anticipated a high offer price. "With less attractive businesses such as Xansa being acquired for 26 times earnings, and the stock having traded above 400p last year, we suspect any bid would have to be over 400p, in the region of 425p," said the broker. By the end of the day, BAE was down 9.5p at 434.5p.

Among the smaller companies, Regent Inns gained 22.92 per cent, or 0.66p, to close at 3.54p after nightclubs operator Luminar said that 3D Entertainment, in which it holds a 49 per cent stake, was interested in entering merger talks with the pubs group. However, Luminar added that, contrary to some rumours, 3D did not plan to make an offer for Regent. By the close of trading, Luminar was down 2p at 223p.