Published October 26, 2009

WALL STREET INSIGHT
Seven-month stock market rally is starting to show signs of wear

By ANDREW MARKS
NEW YORK CORRESPONDENT
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CORPORATE profits in the third quarter are doing what they are supposed to do to support lofty stock market valuations - beating expectations on the bottom line, and showing improvement in sales and revenues. But despite that, the seven-month-long stock market rally appears to be wearing thin.

Not always a straight line: See-saw volatility was witnessed in the stock market last week

Stocks stumbled last week in spite of the mostly dynamite earnings reports from major companies and good news from the slim offering of economic data.

Companies that surprised Wall Street on the upside included Amazon.com, American Express, Apple, AT&T Capital One, Caterpillar, McDonald's, Texas Instruments, UPS and Yahoo.

At the same time, investors received news that the number of existing home sales in September easily outpaced Wall Street economists' consensus estimates.

'I don't think it's any mistake that stocks started to dip after we hit those year-long highs for the Dow and the S&P 500 on Monday,' said Sam Stovall, chief market strategist, Standard & Poors. 'There seems to be a growing consensus that we've already seen the best and the biggest positive surprises from earnings - which means that for the next few weeks, there's not much of an obvious catalyst for further gains.'

He and other stock market prognosticators point out that the next few weeks, especially after this coming peak week for earnings, is somewhat of a dead zone for the stock market until the first indicators of the holiday shopping season start coming in at the end of November and early December.

'If ever there were a time for an investor to choose to take some short-term money off the table, this would be it,' said Mr Stovall, mindful of both the 55 per cent gain for the Dow since March, as well as the most recent rally since September, which has lifted stocks another 7 per cent.

'Stocks hit a lot of strategists' year-end high target when the S&P 500 scrapped up against 1,100 last Monday. That leaves even bullish investors asking where's the upside in staying in the market at this point,' said Bernie Sandler, a trader at Cordlight Securities.

Last week, a key measure of the stock market's value - the ratio of stock prices to corporate earnings - hit its highest level in at least five years. Other market negatives appear to be piling ever higher too.

The weakening US dollar is making Wall Street worried for many reasons, among them inflationary effects. But none of the reasons are more important than its bolstering effect on the price of commodities such as oil, which soared through the US$80 per barrel mark last week, setting off speculation on the possibility of oil prices reaching triple digits again in the near future.

But there may just be some room left for a rally as the coming week brings not just another massive wave of corporate earnings reports, but some major economic reports, including the third-quarter gross domestic product (GDP) number.

Investors can also take some comfort in the resilience that the stock market showed at the end of the week, bouncing off a sharp decline on Wednesday afternoon.

That lack of outright conviction in either the bears or the bulls' favour could be seen in the see-saw volatility witnessed in the stock market last week.

After last Thursday's rebound, stocks sunk again on Friday despite a round of strong earnings and solid economic news. The Dow Jones Industrials gave up 109 points, or 1.08 per cent, to close at 9,972. The S&P's fortunes proved no better, as the broader based index lost 13.3 points, or 1.22 per cent, to close at 1,079.6. The tech-heavy Nasdaq fared the best of the major gauges, but still dropped 10.82 points, or 0.50 per cent, to end the week at 2,154.47.

While another third-quarter earnings announcement barrage is coming Wall Street's way this week, featuring headline companies from ExxonMobil to Procter and Gamble, earnings news will have to share the actual headlines with economic news.

'I think that's a positive to a market that seems to have priced in all the positives of this earnings period already,' said Mr Sandler.

Wall Street has been speculating on the third-quarter GDP number since the summer, when it became apparent that it would be the first quarter of growth since the recession laid the economy low all the way back in the second quarter of 2008.

On Thursday, investors will find out how the third-quarter GDP stacks up against economists' expectations of 3 per cent growth, which would mark an impressive turnaround after the second quarter's 0.7 per cent decline.

Wednesday's September durable goods report is also considered a key indicator of the economy's health.

Moving earlier in the week, the S&P/Case Shiller home price index and consumer confidence are due for release tomorrow, and new home sales for September are scheduled for Wednesday.

Friday brings personal income and spending and the employment cost index, and the Chicago purchasing managers index.

This week's earnings parade, with 150 companies from the S&P 500 index due to report, remains the key for Wall Street. 'Now, instead of hoping that companies beat the Street on revenues so the rally continues, we need to see good numbers to keep the market from selling off,' said Mr Sandler.

Of the 190 S&P 500 companies that have reported 3Q09 earnings till Oct 22, 150 beat estimates and only 23 missed.

Today's reports feature Verizon, McGraw-Hill and RadioShack. Tomorrow, it's British Petroleum, Daimler, TD Ameritrade, US Steel, Visa and McKesson.

Sprint and Motorola are in Wednesday's line-up, which also includes International Paper, Interpublic, Owens Corning, WellPoint, Akamai, Goodyear, Glaxo SmithKline, General Dynamics, Southern Co, SAP, Conoco Phillips, and Owens Illinois.

Thursday is the biggest day for big names this week, with ExxonMobil, Procter and Gamble, Aetna, Allergan, AstraZeneca, CME Group, Colgate-Palmolive, Detusche Bank, Avon Products, Eastman Kodak and Hertz. Kellogg, MetLife Royal Dutch Shell, and Office Depot all due to report during the course of the day.

Friday's line-up of reports has Chevron, Aon, Estee Lauder, Arch Coal, Cigna, Duke Energy and Weyerhaeuser.