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Transports and Home Construction bucking the trend

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Two groups we've been monitoring closely in recent weeks and mentioned just yesterday have broken above their 50-day MA's and has bullishness building in both the Dow Jones Transports (TRAN) 2,765 +1.13% and Dow Jones Home Construction Index (DJUSHB) 382 +3.5%. The bullish action in both of these more "economically sensitive" sectors looks to have the major market averages firming from earlier lows and may have bearish traders playing the scenario of total economic collapse in the U.S. re-thinking things here.

Dow Jones Home Construction Index Chart - Daily Interval

Today's spike higher in the DJUSBH is being brought on by strong earnings from home builder Lennar Corp. (NYSE:LEN) $59.61 +4% after the company reported earnings of $1.51 a share, which handily beat estimates of $1.25 a share, and then raised guidance for its 2002 and 2003 earnings, citing continued strength in the housing markets.

Today's jump out of our lower regression channel really begins to put a cloud over some economic bears that believe the housing sector is due to crumble, marking the final collapse of the U.S. economy. Today however, it looks like the MARKET disagrees with those thoughts.

Dow Transportation Average Chart - Daily Interval

The TRAN has been one of my key indexes to me monitoring for any bullishness to signal a firming in the broader markets and to provide a pulse on the MARKET's belief in a recovering U.S. economy. Today's break above the 50-day should have traders on the alert for bullishness not only in the transports, but the other economically sensitive sectors we've talked about in recent months.

Quick observations have the Forest/Paper Products Index (FPP.X) 366.92 +1.24%, Morgan Stanley Cyclical Index (CYC.X) 568 +0.64% also showing gains.

The often quoted market averages has the Dow Industrials (INDU) 9,715 +0.09%, S&P 500 Index (SPX.X) 1,036 -0.09%, NASDAQ Composite (COMPX) 1,537 -0.35% and Russell 2000 Index (RUT.X) 473.8 +0.87 all recovering from earlier lows. Hinting that other MARKET participants (especially bears) are indeed understanding the current action taking place in the home builders and transports and either locking in some gains on bearish positions or covering small losses.

Further focus must now be given to the Treasury markets. While a bears worst enemy so far has been other bears covering short positions, an equity bear does NOT want to see selling in the Treasury markets that would indicate bullish capital leaving safety and seeking out more risk, yet higher perceived return on capital from equities.

The benchmark 10-year YIELD ($TNX.X) has been "pegged" right at our 50% retracement support level of 4.801% for the bulk of this morning's session, and currently trades with a YIELD of 4.804%.

Jeff Bailey
Senior Market Technician
Option Investor

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