How the Dow Avoided a Bloodbath

Before the opening bell this morning, it appeared that there would be a bloodbath. As markets opened and closed around the world, things were going from bad to worse, culminating in a staggering 7.3% decline in the Japanese Nikkei 225. Yet the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is paradoxically higher late in the trading session. What gives?

The answer is that there were two unequivocally positive economic reports released today by the U.S. government. The first concerned home sales and prices. Data from the Department of Commerce (link opens PDF) showed that the volume of single-family home sales last month climbed to a seasonally adjusted annualized rate of 454,000. While that was only 2.3% higher than the rate in March, it equated to a staggering 29% increase over the same month last year. The same report also estimated that median home prices increased by 15% from $236,400 in April of last year to $271,600 this year.

Given the centrality of the housing market to the national economy, the significance of these results can't be overstated. It's worth noting, moreover, that they provide further confirmation of the growing profitability of homebuilders. Yesterday, for example, the nation's largest luxury homebuilder, Toll Brothers (NYSE: TOL  ) , released earnings for its fiscal second quarter. Among other things, it notched a 36% improvement in net signed contracts on a year-over-year basis. On the heels of today's news, shares of the company are up 2%.

The second positive economic development concerns jobs. According to the Department of Labor, the number of jobless claims filed last week fell by 23,000 from the preceding week. As the following chart illustrates, while this is off the recent lows for this figure, it nevertheless puts the economy back on a level comparable to the beginning of 2008, before the financial crisis sent unemployment spiraling higher.

In terms of individual stocks, shares of Hewlett-Packard (NYSE: HPQ  ) are far and away the best-performing component of the Dow today, up 15.6% at the time of writing. The struggling PC-manufacturer released its second-quarter earnings last night. As my colleague Dan Dzombak noted, HP's earnings per share beat analyst estimates, but its top-line revenue figure came up short. Given its abysmal financial performance of late, however, the bottom-line beat was clearly more than enough to satisfy investors.

Alternatively, the worst-performing stock on the blue-chip index is Alcoa (NYSE: AA  ) , down by 2%. There are two likely explanations for this. First, after the Federal Reserve released the minutes of its most recent monetary-policy meeting yesterday, many analysts are speculating that it may begin to taper back its massive monthly purchases of bonds. The reduced liquidity could send the prices of commodities, including aluminum, lower. And second, as fellow Fool Matt Thalman observed, there's reason to believe that China's industrial purchasing activity is waning, which could put additional downward pressure on aluminum demand and prices.

Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant, simply click here now to get started.


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