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So far, the long shadow of

Federal Reserve

Chairman Alan Greenspan's upcoming semiannual testimony to Congress on Wednesday and Thursday has failed to spook the equity market in any meaningful way.

On the contrary, the major indices resumed their recent uptrend Tuesday, buoyed by strong earnings from


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Merrill Lynch


, as well as big gains by


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ahead of its earnings later in the week. The tech sector, already lifted by last week's results from


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, resumed its leadership role, with the

Nasdaq Composite

adding 28.31, or 1.3%, to 2173.18.

But tech leadership looks set to face a challenge Wednesday as shares of


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were each down in recent after-hours trading after their respective earning results.


Dow Jones Industrial Average

gained 71.57 points, or 0.7%, to 10,646.56, and the

S&P 500

index rose 8.22 points, or 0.7%, to 1229.35.

Bond traders didn't seem to fret too much about the Fed chairman appearance either. Treasury yields fell Tuesday, as traders felt that their prices -- which move in the opposite direction of yields -- had fallen enough to create a short-term buying opportunity. The benchmark 10-year Treasury bond rose 8/32, while its yield fell back to 4.19%.

But the market will still pay close attention to the speech of the Fed chairman. On Monday, news of a letter that Greenspan wrote to a congressman -- in which he repeated that a flattening curve does not always signal economic weakness -- did put pressure on bonds and stocks.

Interestingly, though, housing stocks aren't likely to feel much pressure. They have failed so far to react to rising bond yields -- which are used to set home mortgage rates. While yields have risen steadily over the past three weeks -- from 3.94% on June 30 to close to 4.2% currently -- the Philadelphia Stock Exchange Housing Sector Index has actually breached new highs, with investors seemingly ignoring the market's signal.

Still Building Strength

On Tuesday, the housing index again closed at a new high, after gaining 1.2% upon news of flat, but still strong housing starts in June, while building permits rose 2.4%. With permit activity still steadily rising, strong housing starts can be expected "or the months to come," according to Wachovia economist Gina Martin.

Likewise, the stocks of homebuilders

KB Home

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, which advanced 2% on the day, and

Toll Brothers

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, which rose 1%, both closed at new all-time highs.

Greenspan's letter also helped. In the letter, the Fed chairman indicated that recent warnings from bank regulators about risky lending practices in the housing sector were meant to curb the lending practices themselves, not to "control asset bubbles." More regulations, however, are not in the cards, Greenspan indicated.

Bonds could still see pressure during Greenspan's testimony. Market expectations have him sticking to his script that the Fed will continue nudging interest rates higher at a "measured pace," while providing no hint of a pause in the year-old tightening cycle. But some are nervous that the chairman will sound "more hawkish than expected," says BMO Nesbitt Burns interest rate strategist Michael Gregory.

The strategist, however, forecasts that bond yields will drift sideways at around 4.25% "with a slight upward shift" over the next few months, depending on the strength of economic data.

That shouldn't do much to curb demand for homes and gains in homebuilders stock prices.

"Unless rates start moving dramatically higher, there isn't going to be much impact" on homebuilders, says Jeffrey Kleintop, chief investment advisor at PNC Advisors. It would take yields on the 10-year to rise to 5% to put pressure on the group, he says.

The relative lack of response to rising yields so far, he says, is due to the widespread use of creative lending practices, such as adjustable-rate mortgages (ARMs) and interest-only loans -- the very ones that Greenspan now says won't be more regulated. Contrary to popular opinion, the resetting of ARMs to reflect higher rates has, so far, affected only a small portion of homeowners whose rates move up after one year. "ARMs are mostly fixed for five years and then are flexible," Kleintop says.

While Kleintop expects Greenspan to again mention that there is "froth" in some regions of the U.S., he expects homebuilding stocks to pay little heed to the remarks -- except perhaps on the day -- and to continue moving higher for at least another six months, until the level of interest rates comes back into focus as an issue.

In the meantime, hardly a week goes by without analysts issuing positive comments on major homebuilders. Last week, Merrill Lynch raised its price target on


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and Toll, saying it expects their stocks to be powered by upward earnings revisions in the second half.

To view Aaron Task's video take on today's market, click here


In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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