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New homes sales were better than expected

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New homes sales in April jumped a surprising 1% to a 915,000 annual pace, which was much stronger than economist's forecast for an 883,000 level. This news has the Dow Jones Home Construction Index (DJUSHB) 381.67 +1.43% battling the Gold/Silver Index (XAU.X) 87.91 +1.39% for the early sector gainer on the session.

Dow Jones Home Construction Index Chart - Daily Interval

New home sales continue to show gains and the homebuilders recently had some impressive earnings, many guiding analysts higher on forward earnings. Yet there remains some bearish sentiment toward the group, with the thought being that the economy will "double-dip" into recession and the homebuilders will fall flat on their face. So far, the MARKET hasn't been listening and the homebuilders continue to trade strong. This is perhaps important for bulls that are playing some of the more economically sensitive sectors and deeper cyclicals that can benefit from continued activity from new home construction.

New home construction has an impact on forest product companies, durable goods, chemicals, heavy machinery, transportation and industrial metals sectors. Sectors and portions of the market that continue to show some bullishness in their technicals and areas of the market we've tried to get bullish traders to focus their efforts on.

Last night, in the premierinvestor.net market wrap, I felt traders and investors should be monitoring the Morgan Stanley Cyclical Index (CYC.X) 589.92 -0.41% once again for a potential break above the 600 level. So far today, that break hasn't taken place.

Also on my closely watch list is the Dow Transportation Average (TRAN) 2,764 +0.08% for a break above 2,810, which would have this economically sensitive sector breaking back above a rounding lower 50-day moving average. Recent increases in energy prices have weighted on the group, but they've traded tough back in an area of consolidation.

Jeff Bailey
Senior Market Technician
Option Investor

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