Why the Dow Will Close Higher

Blue-chip stocks are making up at least some of the ground lost over the last few weeks, thanks to better-than-expected data on durable-goods orders and home sales. With roughly an hour left in the trading session, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up by 107 points, or 0.73%.

A bevy of reports from the housing sector seems to be the clear impetus for investors' optimism. The Federal Housing Finance Agency released statistics (link opens PDF) this morning showing that home prices around the country rose by 0.7% in April over the preceding month and 7.4% from the same month last year. The direction of home prices was confirmed by a separate Standard & Poor's report (link opens PDF) that estimated sequential and annual increases of 2.5% and 12.1%, respectively.

According to an economist quoted by Bloomberg News: "Housing's doing really well and I don't think the backup in mortgage rates to date is going to derail it. We're still well off the highs, but price increases could continue for the next several years."

Furthermore, the Department of Commerce today released its estimate (link opens PDF) for new-home sales in the month of May. The data showed that sales of new single-family houses came in at a seasonally adjusted annual rate of 476,000 last month. That's 2.1% better than the revised rate for April and a staggering 29% higher than May of 2012.

And if this weren't enough, the nation's third-largest homebuilder by unit sales, Lennar (NYSE: LEN  ) , released earnings for its fiscal second quarter. Thanks in large part to the preceding trends, Lennar had a good quarter: Among other things, its year-over-year deliveries of new homes surged by 39%, new orders rose by 27%, and its backlog spiked 55%.

As CEO Stuart Miller observed, "Against the backdrop of recent investor concerns over mortgage rate increases, we believe that our second quarter results together with real time feedback from our field associates continue to point toward a solid housing recovery."

On a separate economic front, the Department of Commerce reported (link opens PDF) this morning that new orders for manufactured economic goods -- an important economic gauge -- increased last month by 3.6% over April. And the Commerce Board said its index of consumer confidence rose to 81.4 this month from a reading of 74.3 in May. The measure is now at its highest level since January of 2008.

With all this data in mind, it's little surprise that stocks are reclaiming lost ground today. At present, 27 of the Dow's 30 components are in the green, with only MicrosoftMerck, and UnitedHealth Group down.

The best-performing component is Bank of America (NYSE: BAC  ) , the nation's second-largest bank by assets. B of A's performance, as well as that of other banks, is tied in large part to the health of the housing market. Higher home prices increase the value of collateral and reduce delinquency and foreclosure rates. And higher new-home sales boost mortgage-underwriting activity -- a lucrative source of non-interest income for most banks. At present, shares of Bank of America are up by 3%.

Meanwhile, one of the worst-performing stocks in the broader market today is Barnes & Noble (NYSE: BKS  ) , down more than 17%. The ailing bookseller announced its fiscal fourth-quarter earnings today, revealing just how much trouble it's in. Revenue in its Nook division fell by 34% for the quarter, while same-store sales dropped 8.8%. In response, the company said it will stop producing the tablet versions of its Nook product line.


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