After a monthlong market correction, Tuesday's gains were most welcomed by traders. But any optimism was dampened by the market's shrinkage in the final hour of trading.

After trading as high as 10,509.83, the Dow Jones Industrial Average dropped from its session highs in the final hour of trade, closing up 92.95 points, or 0.9%, to 10,462. Despite losing some altitude, the Dow posted its best gain since Dec. 21. Following similar patterns, the S&P 500 closed up 4.66, or 0.4%, to 1168.41, vs. its intraday high of 1174.30, while the Nasdaq Composite gained 11.25, or 0.6%, to 2019.95 after trading as high as 2037.18.

Newswires provided plenty of positive talking points to set the groundwork for a day that seemed to bode well for a much-desired rebound for stocks.

The Conference Board said its consumer confidence index rose unexpectedly to 103.4 in January, after economists had predicted a dip. That contradicted continued talk about consumer spending weakness on the horizon after the University of Michigan said its consumer sentiment index was lower for the month.

Amid a sea of earnings news, Merrill Lynch ( MER), Johnson & Johnson ( JNJ) and Merck ( MRK) beat expectations despite posting year-over-year earnings declines.

Overseas, China recorded 9.5% GDP growth for the fourth quarter, higher than economists' estimates that called for 8.6% growth. The report raised spirits in the U.S., where investors have long been concerned about efforts in Beijing to slow China's economic growth, for fears of overheating.

Still, as far as earnings and economic indicators go, the market has not exactly been starved for good news in January. Overall earnings growth for the S&P 500 has been posting better-than-expected results throughout the reporting season, and recent economic data have been stellar for the most part.

Rather than mounting a fresh run to the upside, Tuesday's action looked more like a stabilizing day at best. The Dow is now up 0.7% for the week, but still down 3% for 2005. The S&P remains negative for the week, down 0.6%, and down 3.6% for the year.

Meanwhile, the Nasdaq remains down 0.6% for the week, 7% for the year, and it's only a stone's throw away from the psychologically significant 2000 level. The last time it reached that mark was at the beginning of November, before the re-election of President Bush.

With 1.6 billion shares on the Big Board and more than 2 billion in Nasdaq trading, volume was above average but upside volume was only 50% of the total on the New York Stock Exchange and 70% on the Nasdaq; investors were not exactly breaking down the doors to buy stocks.

Instead, Wall Street appeared to be content, for now, that stocks have returned to appropriate levels after a violent swing up in the last two months of 2004 that accounted for virtually all of that year's gains.

"We clearly got way ahead of ourselves in December," said Barry Ritholtz, chief market strategist with Maxim Group and a contributor to RealMoney.com. "There was obviously a lot of January profit-taking, no real inflows and there's no institutional appetite for risk."

Ritholtz noted that while the S&P 500 is headed for year-over-year earnings growth of around 16% for the fourth quarter, growth is closer to 10% if energy stocks are removed from the equation.

"The reason why that is significant is that as oil and gas prices go up, that sucks the air out of the rest of the room," he said. "While 10% growth is respectable, it's not very good when you look at it in the context of earnings momentum from quarter to quarter."

Oil prices were climbing back toward the $50-a-barrel mark, up 83 cents on the day to $49.64, as traders anticipated the release of U.S. inventory data Wednesday morning. The upcoming election in Iraq and the likelihood of violence in that region also may be causing oil market jitters.

Risk Aversion Comes Home to Roost

In addition to concerns about earnings growth, some sector-driven action has given rise to concerns about the market's prospects for 2005. CitiGroup Smith Barney analyst Ajay Kapur issued an upgrade on consumer staples, along with a downgrade on information technology, citing a growing aversion to risk in the markets.

"U.S. tech capacity is increasing, but new growth is faltering and pricing could be an issue," Kapur wrote in a recent research note. He noted that exposure to the food, beverage and tobacco space could be beneficial as "risk-love and growth slow."

Despite improving economic data, the markets appear uneasy about growth estimates for 2005 as the government's economic and fiscal stimulus gets further and further away in the rearview mirror.

"To me, this has been a very manipulated market," Ritholtz said. "Look at all the levers that have been pulled by the government to stimulate growth. The Fed increased the money supply, there were several rounds of tax cuts, the dollar has declined, and there were massive amounts of military spending and deficit spending. I don't know what other levers are left for them to pull, which makes this so dangerous going into the back half of 2005."

Ritholtz predicts more jerky swings one way or the other for the foreseeable future as the market continues to find the footing for an extended period of growth. Meanwhile, John Bollinger, president of Bollinger Capital Management, is in wait-and-see mode for a market that he sees as having room to run.

"The market has gone too far in the wrong direction," said John Bollinger, president of Bollinger Capital Management. "We've left some considerable pent-up demand at these levels."

On Tuesday, the pent-up demand to own stocks held sway, but demand to sell stocks made its presence known late in the session once again.

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