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Dow Industrials hold 100-point gain

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The major indexes continue to hold the bulk of their mid-morning gains after buyers stepped back into stocks on reports that the Homeland Security might lower its terrorist threat level to "code yellow" from "code orange" before the end of the day.

However, I'm currently on the alert for some softening at current levels as I've witnessed another reversal in the bond market and some renewed buying in the longer-dated 10-year and 30-year Treasury bonds. While stocks have seen some intra-day volatility, the same has been true in the Treasury bond markets on today's news events.

At 10:00 AM EST stocks fell to their lows of the session as Treasuries rose to their highs (YIELDS fell back to yesterday's lows) after the release of January new home sales, which fell 15% to a 914,000 annual rate, which was much lower than the 1,050,000 annual rate economists had forecasted.

When stocks looked set to fully test yesterday's lows, stocks and bonds reversed course on reports that the Homeland Security Office might lower its terrorist threat.

However, as noted in the market monitor at OptionInvestor.com, I've become alert to some renewed buying in the 10-year Treasury YIELD ($TNX.X) 3.768%, which is basically flat with yesterday's close, and might have stocks suspect to some softening at current levels. As of this writing, the Dow Industrials (INDU) 7,903 +1.23% are holding a 95-point gain and have been finding some intra-day support at their DAILY S1 pivot analysis level of 7,890, after a brief late-morning pullback to 7,880. For me, a first sign of real softening in the Dow would come on a break below this late-morning low of 7,880 should equity traders begin keying of the bond market's action.

I wanted to quickly look at the PHLX Housing Index (HGX.X) 219.32 +0.21%, which is made up of various new home builders, but also some building products companies from the forest/paper products area that supply construction materials to the new home markets. Of all the "economic pieces of the pie" that have shown continued strength and helped keep modest growth in the U.S. economy, January's decline in new home sales raises some eyebrows.

PHLX Housing Index (HGX.X) - Daily Chart

Economists aren't expressing alarming concern at January's new home sales data, and a quick look at the HGX.X does show this group of stocks has traded off its mid-January highs of 236, but has shows good relative strength versus the major market averages. It has been noted in past Index Trader Wraps at OptionInvestor.com that the Dow, SPX and OEX, which are larger cap market indexes have retraced 61.8% of their Oct-Dec rebound, yet the HGX.X has retraced just 38.2%.

While the HGX.X did dip to a session low of 216.90 on the new home sales numbers, it would appear that the MARKET isn't reacting overly negative at this point to the data.

I've also placed two bullish % readings at the low and recent highs of the HGX.X. Current status for the "Building Sector Bullish %) (BPBUIL) from Dorsey/Wright and Associates shows the sector in "bull correction" status, after reversing lower from the 54% bullish level. It would be my impression that the broader market weakness has had greater impact on this groups recent two-month weakness than anything else.

Component stocks in the HGX.X are (ASD, BCC, BZH, CHB, CMH, CTX, DHI, HOV, KBH, LEN, MAS, MDC, PHM, PMI, RDN, RYL, SPF, TIN, TOL, USG, VMC and WY).

Jeff Bailey

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