The Dow Jones Industrials (DJINDICES:^DJI) had risen 71 points as of 10:45 a.m. EDT Tuesday, further extending their gains over the past week. Although many analysts pointed to solid earnings results, as well as extensive activity on the mergers and acquisitions front, the fact that Home Depot (NYSE:HD) and Caterpillar (NYSE:CAT) were among the top-performing stocks in the Dow this morning points to the importance of the most recent data on existing home sales.

On its face, the data that the National Association of Realtors released didn't look all that positive, as existing home sales in March fell to their lowest level in nearly two years. Yet the 4.59 million-home annualized pace of sales was actually better by 40,000 than economists had expected. With cold weather likely crimping home-shopping activity in January and February -- which would then have led to contracts becoming finalized during March -- even a small sign of strength was enough to make investors more excited about prospects for the housing market.


Home Depot, which gained almost 3%, stands to gain the most from a resurgent housing market. The home-improvement retailer also got a positive nod from an industry analyst this morning, with the report pointing to solid results in areas that weren't affected by the cold winter weather earlier this year. In addition, with costs for materials looking somewhat favorable, Home Depot could be in a great position to capitalize on increased demand from shoppers as the company enters its key spring season.


Source: Caterpillar.

Caterpillar's 1% gain isn't tied as directly to the prospects in the housing market, as its heavy equipment is used for a variety of commercial purposes that go well beyond residential construction. Nevertheless, with housing representing such an important part of the economy generally and the construction industry more specifically, Caterpillar stands to benefit from any uptick in activity in the sector. Unlike Home Depot, Caterpillar gets a substantial amount of its revenue from foreign operations, so even as the U.S. economy has improved, the company hasn't been able to shake the perception of weakening growth in China and other high-growth areas of the world where the construction-equipment manufacturer is trying to tap into favorable macroeconomic trends. In the long run, though, a rising housing market is just one necessary component for Caterpillar to engineer a full turnaround.

Housing plays an important part of the economy, and it has a direct impact on the Dow Jones Industrials. Investors need to keep watching housing data to make sure they understand the role it plays in driving the stock market higher or lower.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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