Market Insider

Published: Friday, 25 Sep 2009 | 8:08 PM ET

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October could bring some rock and roll back to the stock market.

"It's been a good run so far so we should expect some kind of turbulence," said J.P. Morgan chief equities strategist Thomas Lee.

Tammy Gray / AP

As September winds down, many traders say the market's winning streak could end with the close of the third quarter Wednesday. Still, others say that was the consensus view at the end of August, and it was wrong. For them, the market could see a slight 3 to 5 percent dip—after which stocks could continue to consolidate gains.

Wall Street has always had its shares of bulls and bears, but the widely diverging opinions are the hall mark of the nearly seven month-old market rally.

Stocks face plenty of hurdles in the week ahead, including a very heavy data calendar highlighted by Friday's September employment report and Thursday's auto sales and ISM manufacturing survey. Fed Chairman Ben Bernanke also appears before a Congressional committee Thursday.

The Dow and S&P 500 made fresh year highs this past week, but ended the week lower. The Dow was off 1.5 percent at 9665. It is 1.8 percent higher for the month and up 14.4 percent for the quarter, its best third quarter performance since 1939. It is also 47 percent above its March lows.

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The S&P, down 2.2 percent at 1044, is up 2.3 percent for the month, 13.6 percent for the quarter and 54.4 percent since early March. The Nasdaq lost nearly 2 percent in the past week to 2090, but is up 3.9 percent for the quarter and 64.8 percent since March.

Lee said it will be important to see how the S&P 500 finishes September and whether it can stay positive (above 1020).

"I don't know if we could do that. It would be our seventh consecutive monthly gain for the S&P 500. That's only been a feat achieved 15 times since 1928. It's very unusual, but it would bode very well for the next month and would bode very well for the next three months, which carry us into year end," Lee said. Ten of those 15 times, the market was up for an eighth month. "Your probability of being up three months later is 80 percent," and the average gain has been about 4 percent, he said.

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"That would imply just under 1100" for the S&P at year end, said Lee, who like a number of strategists has 1100 as a year-end target. "I just think there's still a lot of money on the sidelines and a lot of skepticism about the recovery, so next week is going to be very important," he said.

Lee believes one of the drags on the market in the past week was the huge amount of new stock that had to be absorbed by the market. "It was $9.4 billion as of Thursday. This year we've been averaging $3.8 billion a week. It's ahead of the pace we've seen all year," said Lee. As of Thursday morning, there were 41 U.S. stock offerings for the week, most of them secondary offerings.

"It's the highest level of issuance since June. The difference was in June, it was all bank deals and now it's spreading through other sectors," he said. For the week, all 10 S&P sectors finished lower, led by the materials sector, off 4.8 percent and financials, off 3.6 percent.

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