Toll Brothers reports lousy preliminary data -- buy or sell on the news?

For the second quarter, homebuilding revenues declined over 50%. The backlog likewise declined over 50%. Net signed contracts were also down substantially. For the six-month frame, both home building revenues and net signed contracts dropped over 50%. I guess there's something to that 50% number, huh?

On a sequential basis, the company saw a big improvement in net signed contracts. However, management's commentary about this improvement does make a good point -- i.e., you can't get too excited about it because it probably merely represents a natural bounce off some severe lows. It's true: if you're coming off a very bad quarter, a sequential increase may not mean as much.

But, on the other hand, investors would rather see an increase than a decrease. And shares of Toll Brothers have been doing better over the last few months. The recession, credit crunch, and housing crisis are by no means over. Yet, a lot of stocks have been rising. Taking into account the positive sequential comparisons, the news flow about better times on the horizon, etc., should investors consider Toll Brothers as a possible buy?

Although my gut is telling me that Toll Brothers has more room to the upside because of the current sentiment of the markets, I can't help but feel very wary about buying. Housing remains in a terrible state. The economy still has a ways to go in terms of reaching a safe spot. Sure, you look at a situation like Lowe's Companies, Inc. (NYSE: LOW), and you see all the buying that happened on bad data and you say to yourself, "Hey, let's buy stocks!" But I think investors should remain skeptical and cautious with all their buys.

Disclosure: I don't own any company mentioned; positions can change without notice.