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An upcoming economic report could shed light on the economy — and drive stocks

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Why the mortgage applications report is a great gauge of economic recovery

The Mortgage Bankers Association is set to release its weekly mortgage application data Wednesday before the market opens, and some are watching the report as a measure of broader economic health.

The report is particularly important because housing is the lynchpin to the recovery appearing in the overall market, says Dennis Davitt, portfolio manager at Harvest Volatility Management.

"An increase in the mortgage application number will show that there's a lot of consumer confidence out there, and people are believing in the current economic rebound that we're seeing," Davitt said Tuesday on CNBC's "Trading Nation. "

The prior weekly report reflected a week-over-week growth of 0.43 percent. The survey covers about 50 percent of all U.S. retail residential mortgage originations.

If the housing market heats up, financial stocks will "heat up, and you'll also see suppliers heat up," as a result, Davitt said. Theoretically, a rising number of mortgage applications means demand for housing is rising, and banks will need to facilitate such applications.

Coincidentally, as Davitt pointed out, those are areas that have been lagging the broader market. The financial sector is lagging the this year by about 2 percent, and the materials sector is underperforming the broader market by about 1 percent in the same time.

The survey's results will also likely impact real estate-related equities and funds, such as the iShares U.S. Real Estate exchange-traded fund, the IYR. One stock Davitt particularly likes to track when a figure such as mortgage applications comes out is homebuilding firm PulteGroup.

"I feel like it's best in breed in the sector, and it tends to outperform the overall IYR ETF market," he said.

Disclosure: Dennis Davitt does not own shares of PulteGroup.