Stock Rally Relaxes for the Holidays

It was going to take a lot for the few investors paying attention to Thursday’s market to give the late-year rally another push higher.

As it turned out, a relatively flat�session was a perfect fit for a day when focus on the financial markets slowly but surely drifted to clock-watching and weather and traffic alerts.

Stocks finished a mixed bag on Thursday — The Dow Jones Industrial Average did tack on another 14 points of upside to close the week (markets will be closed on Friday for the Christmas holiday) at 11,573, but the S&P 500 and Nasdaq both slipped 0.2%.

The rally’s recent fuel, financial stocks, set the tone for the lackluster session, and finished in the red. The Financial Select Sector SPDR (NYSE:XLF) exchange-traded fund, which had closed higher for six straight sessions, finished 0.7% lower at $15.87. Regional banks also followed suit — the SPDR-KBW Regional Banking (NYSE:KRE) ETF dropped 1.5% to $26.49, reversing a trend that had seen the fund jump 7% in the past week.

The market’s bright spots were reserved for stock-specific winners like Bed Bath and Beyond (NASDAQ:BBBY), which jumped 5% on Friday after blowing past earnings estimate after Wednesday’s closing bell, and for those investors both long oil and/or volatility.

For oil bulls, it was a good week, with February crude rising 3.3% to $91.51. Oil producers and oil-service stocks rose in kind: ExxonMobil (NYSE:XOM), for example, closed up 0.6% to $73.20, and has jumped an impressive 25% since early September.

The eventual cloud in this silver lining, of course, is the effect, both real and perceived by investors, of what higher oil prices mean for the sluggish U.S. economic recovery — following the well-understood maxim that every $1 rise in oil decreases GDP by $100 million.

For volatility bulls (if there is such a thing anymore), the session was more of exception trumping rule. As economist David Rosenberg pointed out Thursday, with extreme complacency exhibited in overwhelmingly bullish investor sentiment, the CBOE Market Volatility Index had collapsed to levels not seen since the summer of 2007, when all appeared rosy (even though it wasn’t).

Three and a half years ago, a bet that volatility would skyrocket paid off handsomely when reality set in — is it too soon for history to repeat itself?

The morning’s economic data did little to decide things one way or another: personal income and spending were largely in line, as were initial jobless claims, although durable goods orders and new home sales came up short.

With even less data and corporate news expected next week, a rangebound drift within a 2% range to close the year appears as likely as anything else.