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Goin' Into The Close

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The rotations have been wild and volatile today. We're witnessing movement back into defensive names today, which includes drugs, biotechs and pharmaceuticals. Along with the ebbs and flows into the aforementioned, we're witnessing mixed signals with weakness in the finance names yet, at the same time, strength in the retail sector.

The divergence between the interest-rate sensitive retail sector and the finance space is making the tape all the more difficult to read today. The convoluted signals in the market stem from the economic data released earlier this morning.

The Commerce Department reported retail sales for December that came in a little stronger than expected, suggesting the U.S. consumer hasn't completely stopped spending. As Mr. Baltimore wrote this morning, sales for December rose 0.1 percent versus expectations of a 0.4 percent decline. The strong sales numbers this morning explains the strength in the retail sector today. But the retail sales numbers were boosted a bit by auto sales which rose an unexpected 0.3 percent on a month-over-month basis. Again, the significance of the retail sales number is the U.S. consumer hasn't completely stopped spending money and that fact may erase the fears of recession which have been widespread across Wall Street and Main Street.

S&P Retail Index - Last Six Months

While the retail sales number did provide a boost in confidence that the U.S. economy would not slip into a detrimental recession, the producer price index (PPI) was cause for concern. The core PPI rate, which excludes volatile energy and food prices, rose 0.3 percent, much greater than the expected 0.1 percent. Now while retail sales rose, which was a good thing for the markets, the unexpected rise in wholesale inflation was disconcerting. And the reason the rise in the PPI was not good for the market today is because the Fed might not act as aggressively at its meeting later this month. Many on the street had suggested the Fed may cut by another 50 basis points at its upcoming meeting, but after today's signs of increasing prices in the PPI, the consensus shifted to the probability of a 25 basis point cut. Just take a look at the action in the benchmark 10-year note on the chart below.

10-year Treasury Note - Last Six Months

The bond market did close early today because of the holiday Monday, but you can see the selling that took place throughout today's session on the chart above. Remember that selling in the bond market translates into higher yields!

Since the bond market has been closed a little over an hour, we're going to see equities trade on their own into the close of trading. And with a three day weekend ahead, we're likely to witness muted trading in equities for the remainder of the day. With mixed signals coming from finance and retail, it will be hard for the markets to make much headway. It's probably best to sit aside and wait to put on any new positions until next week as the tape remains tough to read because of the aforementioned issues. But if you're putting on new positions or have anything open, just remember that overnight risk remains (remember Hewlett Packard and Gateway last night). Stay disciplined with tight stops in this whipsaw market.

Eric Utley
Contributing Editor

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