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Here's why traders have their eye on housing market

With housing starts the best sign so far of a second-quarter rebound, traders are watching Thursday's existing home sales data to see if the sector will continue to show signs of life.

"The only two games in town (Thursday) are going to be the jobless claims and existing home sales," said Ward McCarthy, chief financial economist at Jefferies. "And so far, the thing is, if we're going to see a rebound in the second-quarter economic activity—and I think we will—a lot of it is going to be centered in housing."

Stocks closed mixed Wednesday, and Treasury yields edged lower, with no great reaction in either market to the minutes from the Fed's last meeting, released mid-afternoon. The 10-year note was yielding 2.25 percent in late trading.

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

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But traders were watching the outsized decline in the Dow Transports as a warning of sorts coming so quickly on the heels of a new high in the Dow Industrials. The Dow was off 28 Wednesday, to 18,285, while the Transports, led by airlines, plunged nearly 2 percent. The S&P 500 fell 1 to 2,125, but the Nasdaq edged higher by more than a point to 5,071.

The S&P 500 also hit a new high on Monday. "I think the new highs that we're seeing are low quality, and it's unlikely a sustainable breakout is going to occur. There's a technical deterioration and fundamental deterioration that don't support a breakout," said Michael O'Rourke, BTIG chief market strategist.

O'Rourke said the Transports should be confirming the Dow's new high, according to Dow Theory. "This is called a bearish nonconfirmation because the industrials are at a new high," O'Rourke said.

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Wednesday's existing home sales data, at 10 a.m. ET, is expected to show a 1 percent gain, to 5.24 million units. Jobless claims, at 8:30 a.m., are expected to rise to 271,000 from 264,000. Manufacturing PMI is also reported at 9:45 a.m., and leading indicators are at 10 a.m.

Housing starts surprised to the upside this week, with construction up 20.2 percent to a seasonally adjusted 1.135 million, the highest since 2007 and the biggest jump in more than two decades. Building permits rose more than 10 percent.

Other housing data this week included the NAHB home builders survey, which showed a decline in confidence for the fourth time in five months. "We're one for two. The NAHB was sort of blah, and the housing starts numbers were pretty encouraging. The other two numbers we see coming up are existing home sales for April and new home sales. If we see existing home sales moving in the right direction, that will offer some hope," McCarthy said.

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Earnings Thursday are expected from Hewlett-Packard, Best Buy, Booz Allen Hamilton, The Buckle, Trina Solar, Marvell Tech, Ross Stores and Aeropostale.

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