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Lights are on, is anyone home\?

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Today's plethora of economic data bombarded the markets earlier in the session as consumer confidence improved markedly and new home sales were strong, but after an early bump for stocks, we've seen a rather muted response.

If it hadn't been a week where most institutional house executives and fund managers took the week off, volume would most likely be rather robust, but today's trading is much like that seen in recent sessions this week. Volume is rather light leaving many to wonder if today's economic data was meaningless or the response will come next week after the New Year's holiday on Tuesday.

In our 11:00 EST Update on OptionInvestor.com, the Dow had just recently broken above the post-September 11th high of 10,170 and traded as high as 10,184, but has since dipped into fractionally- negative territory to now rebound with a 6-point gain.

One group I would have thought might get going today on the market thinking good economic growth from today's data would have been the Dow Transportation Index (TRAN), but that hasn't happened. For me, this group should do well on a strengthening U.S. economic picture. So far, the group remains stuck just below its 200-day moving average, and until I see a break above the moving average, I'm still cautious toward economic recovery.

Two things could be at play here as a negative. One is a still sputtering economy, but another could be today's news out of OPEC that it will be cutting production by 1.5 million barrels per day. The effect could be higher gasoline prices, a major cost for many in the group.

Dow Transportation Index Chart -

The transports are thought by many to be one of the groups that benefit most from a recovering economy. Perhaps today's OPEC production cut has some bulls in the group setting on the sidelines, even though the bulk of today's economic data didn't hold any real negative surprises. The real upside surprise was the consumer confidence number being so strong at 93.7 relative to economist's estimates of 82.7%, but that number doesn't necessarily move some of the deeper cyclicals or industrial side of the economy.

Earlier this morning we did see March Crude futures (cl02h) move higher at $21.60 per barrel, but as the trading session progresses in that market, crude has fallen back into negative territory at $20.78 per barrel.

It's very tough to say if the unfolding "muted response" to today's economic data is "not bullish" or if the holiday week and light trading volumes we've seen is just a sign that not all participants have cast their votes yet.

The bond market is rather quite too with YIELDS mixed. The shorter-term maturities are seeing some buying and the longer-end of the market is seeing fractional selling. In all, the current market response looks satisfied with today's economic number, but not surprised enough to get an overly bullish rally underway.

Sector strength is pretty much where it was after the 10:00 AM economic data. Oil Service stocks (OSX.X) have given back about 1/2 of their gains, but remain in positive territory +1%. Internet stocks (INX.X) are up 2%, Software (GSO.X) are up 1.94%, Airlines (XAL.X) and Semiconductors (SOX.X) are both up 1.7%.

Jeff Bailey
Senior Market Technician
Option Investor

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