Published April 20, 2009

WALL STREET INSIGHT

Pullback seen, but mood remains upbeat

Traders will want good earnings reports to continue buying momentum

By ANDREW MARKS
NEW YORK CORRESPONDENT

	Email this article
	Print article
	Feedback

THE bullish momentum behind what is now a six-week-long rally in US equities - a rally of historic proportions - is showing signs of slowing.

But even if the winning streak for the Dow Jones Industrial Average, Nasdaq Composite and the S&P 500 indices does end with a pull-back over the next five trading sessions as many Wall Street traders expect, the outlook for US stocks remains upbeat.

'The essential question we've all been asking over the last few weeks, as the market has staged this surprisingly strong comeback, is whether this rally is a vicious head fake in what's still a bear market or is it a real and sustainable rally off the bottom,' observed Nick Colas, the chief market strategist at BNY Convergex Group. 'The answer for me is shaping up to be that although the stock market has come too far, too fast, off that bottom, there are enough areas of internal consistency in the market to validate this move as a sustainable upturn.'

Indeed, there was more than enough troubling news to send investors running for the exit last week. The surprisingly sharp drop in retail spending data in March and a disappointing new-home construction report that showed the second-slowest pace in home building in fifty years served to undercut growing expectations that the US economy is approaching a bottom that will pave the way for a rebound in the second half of the year.

Then there was the announcement of the bankruptcy of General Growth Properties, the largest mall operator in the US, reminding Wall Street that the commercial real estate market could end up being nearly as bad as the residential market.

The fact that the bulls won the week's tug-of-war could indicate that the inevitable dip in stock prices expected very soon will not be too steep or last too long.

But instead of letting those developments torpedo stocks, investors didn't panic, showing their continued willingness to look past bad numbers and giving more credence to the cautious optimism voiced in the Federal Reserve's Beige Book report on economic trends, a modest drop in weekly jobless gains, and the best reading on consumer sentiment since September, along with profitable quarters from JPMorgan Chase and Citigroup.

The fact that the bulls won last week's tug-of-war between hope for the economy and an earnings rebound on the one hand, and the very clear signs that the bottoming process for the economy is far from certain on the other, gave Hugh Johnson, chief investment strategist at Johnson Illington Advisors further reason to believe that 'the inevitable dip in stock prices we're going to experience very soon will not be too steep or last too long'.

'When you get an advance of 30 per cent in six weeks you're in overbought territory, unless we've achieved world peace or discovered how to safely harness nuclear fusion. There's going to be a pullback, but I don't think it will be severe enough to discourage the market,' said Mr Johnson.

Mr Colas also expects a mild retreat for stocks over the next few weeks, but pointed to the profit reports from JPMorgan Chase and Citigroup as positive signs of the market's longer-term health. 'Financials have to continue leading the way in the stock market rally to confirm the uptrend. That's why these earnings from JPMorgan and Citi are so important. Everyone is well aware that without healthy banks, there will be no economic recovery,' he said.

Last Friday, a round of late afternoon selling kept the day's gains modest. The Dow Jones Industrial Average rose 5.90, or 0.07 per cent, to close at 8,131.33. The S&P 500 rose 0.5 per cent to close at 869.60, and the Nasdaq added 0.2 per cent, to finish the week at 1,673.07.

For the week, the Dow Jones tacked on 0.6 per cent, the S&P 500 rose 1.5 per cent, and the Nasdaq advanced 1.2 per cent.

Those are impressive numbers for a rally of almost 30 per cent over six weeks long, but if Wall Street is going to get through the heaviest part of the earnings period with a stable stock market, investors will need enough encouragement out of key reporters such as Bank of America, which broke back above the US$10 mark this week.

'The downside of the fairly positive results we've gotten in earnings thus far is that expectations are now rising,' noted Mr Colas. 'And we've started seeing the 'buy on the rumour, sell on the news' mentality, as with JPMorgan's results.'

Bank of America is far from the only major company in the spotlight this week, as more than a quarter of S&P 500 companies will report earnings. Today, Halliburton, Eli Lilly, IBM, Boston Scientific, and Texas Instruments will announce their earnings.

Then tomorrow, the earnings onslaught really gets going, with earnings releases scheduled for Caterpillar, Coca-Cola, Merck, Schering-Plough, Dupont, United Tech, Delta Airlines, Lockheed Martin, State Street, United Health, US Bancrop, Yahoo, Broadcom, and Capital One.

Wednesday brings first quarter results from companies such as AT&T, Boeing, McDonald's, Morgan Stanley, Wells Fargo, Altria, Ingersoll-Rand, Kimberly-Clark, Apple, eBay, and Qualcomm. Thursday's line-up includes Conoco-Phillips, GlaxoSmithKline, Pepsi, UPS, Fifth Third, Marriott, PNC Financial, SunTrust, Union Pacific, US Air, Microsoft, Amazon, AmEx and Burlington Northern.

The earnings storm slows a little on Friday, but not much, with reports due from 3M, Honeywell, Schlumberger and Xerox.

Economic data may take a backseat to earnings this week, but there are several important economic reports that will test the bullish thesis that a turnaround is just around the corner.

The leading indicators report is slated for release today. Along with the closely watched weekly jobless claims on Thursday, investors will be eyeing existing home data for March. New-home sales and durable goods orders will be reported on Friday, as the G-7 meeting gets underway in Washington.

Wall Street has often followed Washington's lead this year, and so it will behoove investors to pay attention tomorrow when Treasury Secretary Timothy Geithner appears before a Congressional panel to discuss the Troubled Asset Relief Program funds.