Surprise drop in housing data checks market's rise

NEW YORK -- A record low in housing construction has investors doubting the economy again.

Stocks closed narrowly mixed in light trading Tuesday as the surprise drop in construction and a cautious outlook from retailer Home Depot Inc. led energy and utility stocks to pare gains.

Construction of homes and apartments fell 12.8 percent last month to the lowest pace on records going back a half-century, the Commerce Department said. Analysts had expected housing starts to rise.

The report did contain some positive signs, including a rebound in single-family construction that partly offset a drop in apartment construction. And a sharp pullback in construction is necessary to rid the housing market of excess inventory, many analysts pointed out.

Wall Street has been trying to get a read on the housing market for months as investors look for solid signs the economy is recovering. Stocks surged more than 3 percent on May 4 following unexpected increases in pending home sales and construction spending. But a big inventory of unsold homes and record foreclosures are swallowing much of the demand, making it hard for prices to stabilize.

"The housing number on the surface was horrible," said Alan Valdes, vice president at Hilliard Lyons in New York. But he said the whittling away of inventory will help prices eventually.

Although the construction figure was seen as a setback, it also did not set off heavy selling. Valdes noted that the light trading volume ahead of the long Memorial Day weekend meant the market was likely to drift barring any news that could change investors' mood.

The Dow Jones industrial average fell 29.23, or 0.3 percent, to 8,474.85.

Home Depot was the biggest loser in the Dow, falling $1.39, or 5.3 percent, to $24.63 after saying its markets are still under pressure. Profits at the nation's largest home improvement retailer climbed 44 percent, better than expected, as the company booked fewer charges.

Broader stock indicators were mixed. The Standard & Poor's 500 index fell 1.58, or 0.2 percent, to 908.13, while the Nasdaq composite index rose 2.18, or 0.1 percent, to 1,734.54.

About three stocks rose for every two that fell on the New York Stock Exchange, where consolidated volume came to 5.44 billion shares, down from 5.49 billion on Monday.

"It's hard enough to get going after you've been up 30 percent in the S&P 500 in 10 weeks," said Hugh Johnson, chief investment officer of Johnson Illington Advisors. "When you have news that's as deflating as this, it gets nearly impossible."

On Monday, encouraging news from Home Depot rival Lowe's Cos. and an improving outlook for banks had lifted the S&P 500 index back into a gain for the year. It's still up marginally for 2009 after Tuesday's dip.

In a positive sign for Wall Street, one measure of the market's uneasiness fell again after sliding 8.7 percent Monday. The Chicago Board Options Exchange Volatility Index, or the VIX, fell below 30 on Tuesday for the first time since September. It hit a record 89.5 in October at the height of the financial market meltdown. The historical average is 18-20, well below Tuesday's level of 28.8, but the decline signals that investors are more confident about the stock market's direction.

David Kelly, chief market strategist at JPMorgan Funds, said the drop in expectations for volatility and the market's relatively calm response to bad economic news in light trading is a departure from only months ago, when stocks likely would have tumbled sharply.

"The market was assuming the economy would never come around. Even though we are waiting for a turnaround, this certainly is indicative of an economy that is stabilizing," he said.

Kelly added that every day without another proverbial shoe dropping helps traders build confidence.

"Every shoeless day is a good day," he said.

Another sign that the rally has staying power is the strength in industries such as basic materials, industrials and technology, Johnson said. These are the types of companies that usually perform well in a market comeback.

"It's not just that the stock market has been going up -- it's that the right sectors have been leading the performance parade," Johnson said.

Rising prices for oil and materials lifted energy and commodity stocks. Rising prices are often seen as a sign that investors are expecting economic activity will increase and drive demand for raw materials. Peabody Energy Corp. rose 89 cents, or 2.9 percent, to $31.65, while the utility PPL Corp. rose $1.18, or 3.8 percent, to $31.94.

Light, sweet crude rose 62 cents to $59.65 a barrel on the New York Mercantile Exchange.

Credit card companies fell after the Senate voted to prevent them from arbitrarily raising consumers' interest rate and charging many of the high fees that have become customary. American Express Co. fell $1.34, or 5.1 percent, to $24.79, while Capital One Financial Corp. fell $1.16, or 4.5 percent, to $24.90.

In other trading, the Russell 2000 index of smaller companies fell 1.53, or 0.3 percent, to 493.26.

Bond prices were mixed. The yield on the 10-year Treasury note was unchanged at 3.24 percent.

The dollar fell against other major currencies, while gold prices rose modestly.

Overseas, Britain's FTSE 100 rose 0.8 percent, Germany's DAX index rose 2.2 percent, and France's CAC-40 rose 0.9 percent. Japan's Nikkei stock average jumped 2.8 percent.