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First taste of economic data is bitter sweet

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Today's economic data has the ISM Index (formerly known as the National Association of Purchasing Management) rising to 48.2 in December and higher than November's reading of 44.5. Today's ISM number was also better than economist's expectations for a reading of 45.8. "The recent rebound in the ISM over the past couple of months is giving some hope that the economic recovery may come faster that is generally found in a major downturn" the ISM said.

The ISM index has been below the 50 level for 17 straight months, the longest contraction in the factory sector since the 19 months in 1981-1983. Today's 48.2 reading is the highest reading since October of 2000. A reading below 50 is still a sign that the economy is contracting, while a reading above 50 indicates expansion.

As the overall ISM number is dissected, new orders hit 54.9 in December following a 48.8 reading in November. Production rose to 50.6 from 47.1. "This suggests that inventory cuts reached such an extreme in October and November that a reordering cycle has begun, especially in some of the consumer sectors," said John Youngdahl, and economist at Goldman Sachs. "The main question now is whether this reordering cycle will be sustained."

Ian Shepherdson, chief U.S. economist at High Frequency Economics said, "This is a hugely encouraging report, pointing clearly to a vigorous recovery. No more Fed easing needed here."

Stock action

Stocks remains mixed to lower in today's trading session. Early sector strength in the Semiconductor Index (SOX.X) is still holding, but off from earlier levels. In early trading, the SOX.X has posted a high 2% gain to now trade up 1.7% at 324. Morgan Stanley made some comments on the Semiconductor Industry Association data out Monday evening; revenue of $9.8 billion in November was 4% below firm's estimate, but only 1% shy on a 3- month average basis. Based on the firm's view that reduced backlogs and seasonally weak demand will promote a reasonably high level of earnings risk in Q1, firm expects most semi stocks to remain in a corrective phase over the near-term.

Oil service stocks are taking it on the chin as the Oil Service Index (OSX.X) trades down 4.7% at $83. This morning, JP Morgan downgraded shares of BJ Services (NYSE:BJS) to "market perform" from "long-term buy" based on valuation; recommending Hanover Compressor (NYSE:HC) $25.26 for those wanting exposure to the natural gas market.

The broader market averages are in the red with the Dow Industrials trading down 75 points at 9,946 (support in the 9,700 range), the S&P 500 Index is down 9 points at $1,138 (support near $1,120) and the NASDAQ Composite is down 8 points at 1,942 (support near 200-day MA of 1,925).

Jeff Bailey
Senior Market Technician
Option Investor

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