Of Tuesday’s three relatively weak economic reports, the NAR report on Existing Home Sales for December showed a nice year-over-year advance.

Tuesday brought three relatively weak economic reports.  The most closely-watched was the December report on Existing Home Sales from the National Association of Realtors.  Based on a seasonally-adjusted annual rate (SAAR), economists were expecting 4.97 million sales in December, with inventory falling to 1.87 million.  The report indicated sales of 4.94 million homes although the inventory was more significantly reduced to 1.82 million.  So-called “distressed homes” (foreclosures and short sales) accounted for 24 percent of December sales.  After subtracting the distressed sales from both December of 2012 and December of 2011, the number of conventional sales in December of 2012 was 3,754,400 – representing a 26 percent increase from the approximately 2.98 million in December of 2011.  Is the Fed Trying to Create Another Housing Boom?

From the report:

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, but are 12.8 percent above the 4.38 million-unit level in December 2011.

The preliminary annual total for existing-home sales in 2012 was 4.65 million, up 9.2 percent from 4.26 million in 2011.  It was the highest volume since 2007 when it reached 5.03 million and the strongest increase since 2004.

Tuesday’s second relatively weak economic report was the Federal Reserve Bank of Chicago’s National Activity Index for December, which revealed that economic growth dipped slightly below trend.  The Chicago Fed National Activity Index (CFNAI) is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data:

1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.  Chicago Fed National Activity Index

From the report:

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.02 in December from +0.27 in November.  Two of the four broad categories of indicators that make up the index decreased from November, and only two of the four categories made positive contributions to the index in December.

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The CFNAI Diffusion Index also moved up in December, increasing to –0.05 from –0.12 in November.  Forty-one of the 85 individual indicators made positive contributions to the CFNAI in December, while 44 made negative contributions.  Thirty-six indicators improved from November to December, while 48 indicators deteriorated and one was unchanged.  Of the indicators that improved, 17 made negative contributions.

The Richmond Fed’s Fifth District Survey of Manufacturing Activity for January dropped to negative 12 from December’s reading of positive 5.  The silver lining in this cloud concerned expectations for future growth:

Looking ahead, assessments of business prospects for the next six months were somewhat more optimistic in January.  An increasing number of contacts anticipated faster growth for new orders, capacity utilization, vendor lead-time, average workweek and capital expenditures, pushing up those indicators.

The major ETFs expected to respond to the December report on Existing Home Sales and the Chicago Fed National Activity Index are:

iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR):  +0.46%

Vanguard REIT ETF (NYSEARCA:VNQ):  +0.51%

Industrial Sector SPDR ETF (NYSEARCA:XLI)  +0.38%

SPDR S&P Homebuilders ETF (NYSEARCA:XHB)  +0.35%

iShares Basic Materials Sector ETF (NYSEARCA:IYM)  +0.94%  Learn More About iShares ETFs

Bottom line: Although Tuesday’s three economic reports were relatively weak, the Existing Home Sales report showed a significant year-over-year improvement, the Chicago Fed National Activity Index showed that economic growth dipped only slightly below trend and the Fifth District Manufacturing Survey revealed a positive outlook for the next six months.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.