Positive Economic Data Push Markets Higher

New home starts boost small banks and building stocks

   

Stocks rumbled higher again on Thursday, as softening earnings and weak manufacturing data was ignored in favor of positive new information about the housing recovery.

The mood change was particularly positive for two overseas companies: ASML Holdings (NASDAQ:ASML) reported an excellent fourth quarter in the Netherlands, as we anticipated and Brazilian beverage giant Companhia de Bebidas das Americas (NYSE:ABV) continued to steam higher after breaking out to new highs two days ago.

On the other hand, financials were bogged down by weakness at Bank of America (NYSE:BAC) and Citigroup (NYSE:C), following weaker than expected earnings. Don’t cry too much for the big banks though as the smaller regional banks did fine, led by Fifth Third (NASDAQ:FITB), up 4.8% and Huntington Bancorp (NASDAQ:HBAN), up 4.2%. The reason appeared to be related to housing as more starts means an improvement in loan growth. Housing stocks, as well as semiconductor and semiconductor manufacturing companies performed well. The Semiconductor Index ($SOX) rose 2%, pushed up by chip equipment makers like KLA Tencor (NASDAQ:KLAC) and Applied Materials (NASDAQ:AMAT).

The housing recovery was truly the bright spot as starts were reported to have increased 12.1% month over month to a 954,000 seasonally adjusted annual rate in December. The consensus expectation was for just a 3.3% increase, so it was a blowout. Single-family starts were up 8.1% and the starts of the more volatile multi-family segment were up 20.3%. Permits increased 0.3% to a 903,000 seasonally adjusted annual rate, below consensus expectations for a 0.5% increase. However, single-family permits did increase 1.8%. Warmer weather in December was a cited as the tailwind for the jump in starts, while Sandy-related rebuilding was also highlighted as supportive. This sector may offer the best stocks for 2013.

Building stocks outperformed on the news, led by Pulte Homes (NYSE:PHM) and Lennar (NYSE:LEN), which has been pulling into support earlier in the week. Housing related retailers also rose, with Lowe’s (NYSE:LOW) up 3.8%, and materials providers like USG Corporation (NYSE:USG) jumping 2.3%. (Find a trade recommendation for LOW here.)

And that’s not all. Unemployment claims plunged by 37,000 to 335,000 in the week ended Jan. 12 from the prior week. This was well below the 369,000 consensus and the lowest level in five years. However, a Labor Department spokesman did note that the outsized decline may have been a function of a seasonal adjustment issue. The four-week moving average, which smoothed out some of the volatility in the data, only fell to 359,000 from 366,000.

On the downside of the data, regional manufacturing reports were disappointing again. The Philadelphia Fed index fell to -5.8 in January from 4.6 in December, well below the 5.6 consensus. The underlying details of the report also disappointed.

New orders, employment and shipments were all down.  Economists noted that the weakness fits with the signals from the Empire State survey out earlier this week, as well as some of the manufacturing takeaways from the Fed’s January Beige Book. However, there may have been a Superstorm Sandy overhang.   Nevertheless, cyclical stocks performed well as investors appear willing to look past the trough.

Recently, I gave HollyFrontier (NYSE:HFC) as my Trade of the  Day. You can use any weakness to establish positions near my $43.75 buy under.

 

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

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