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Market Insider
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The wave of corporate earnings reports in the coming week could wash over the stock market without eroding its recent gains.
That's the view of some traders, who have been waiting for weeks for the rally to show signs of fading and have been surprised stocks have weathered the first battery of earnings reports so well.
"Everyone is starting to go short because they're afraid, but the market keeps going up," said Michael O'Hare, head of equities trading at LaBranche Financial.
"There's a thirst for good stocks. The dip is being bought, and there's more institutional money coming in."
More than a quarter of S&P 500 companies report earnings in the week ahead, and there are just a couple of important economic reports, including durable goods and existing home sales. The Treasury Department releases its report on the composition of stress tests for the banking industry Friday. Also at the end of the week, finance ministers meet in Washington ahead of the International Monetary Fund's weekend meeting.
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Richard Drew / AP |
Major financial companies, like Bank of America, Wells Fargo and Morgan Stanley, will get the most attention, but there are plenty of reports from a range of sectors including major pharmaceutical, consumer products, technology and industrial companies. Dow components, like Coca-Cola, AT&T and McDonald's also report. Collectively, the S&P 500 are expected to see earnings decline 37 percent this quarter.
Stocks finished a sixth week of gains, with the Dow up 0.6 percent to 8131; the S&P 500 up 1.5 percent to 869, and the Nasdaq up 1.2 percent for the week, at 1673. Financials were the best performers, up 4 percent on the week, followed by the industrials, up 3.3 percent, and consumer discretionary stocks, up 2.5 percent.
Whither Stocks
The stock market's move has defied the conventional wisdom in many trading rooms that the market is ready for a correction of 10 percent, or even more. Some are expecting a retest of March lows.
Thomas Lee, J.P. Morgan's U.S. equities strategist, issued a note Friday discussing just that. "I guess the question I'm asking myself now is why this rally has been so resilient, and quite so dynamic, and I think a lot of it has to do with so much liquidity sloshing around," he said in a phone interview.
From 'Mad Money':
Lee though believes a retracement will come, but the velocity of the decline in January and February, which took the market to March's lows, may be one reason it's taking so long. He pointed to the market's previous sharpest falls, in 1932 and 1938. While more extreme than is likely now, the market both times climbed back by more than 90 percent before retracing losses.
"I do think it just tells you it's a little bit of a rubber effect. I kind of still think the retracement is imminent. I'm pulling my hair out and a lot of people are puling their hair out, waiting for it," he said. "The good news is it really supports our view that when you get into the second half of the year, you really have to get constructive on stocks."
Lee said the market should pull back, then begin to move up amid signs the economy is improving in the second half and that could be the start of a new bull market. He also said many investors believe credit leads a recovery, but historically in major market bottoms since 1962, equities have led a bottom in credit by about two months.
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Brian Rauscher of Brown Brothers Harriman, a long time bear, turned bullish several weeks back, when stocks just started to climb. His expectations were that the market would sell off in the not too distant future, and then track higher to a range of 950 to 1000 on the S&P in the next three to five months. This week, he said he is watching the market closely because it is moving ahead faster than he thought it would.
"I'm actually concerned I might hit my targets sooner than I anticipated. To me this is classic, classic bear market, where things are less bad. There's some people that are skeptical, saying the market's run too far, too fast. The market ten weeks ago was pricing in the end of the world. Now, we're just in a crappy world, not the end of the world. What will really make the difference is if sometime in 2009, the world will go from being crappy to being mediocre to maybe showing some growth," he said.
From 'Fast Money':
Rauscher said the measures he looks at are all still showing a positive move for stocks. "875 to 880 (on the S&P) looks important from a technical standpoint. It looks to be an area that should provide some type of headwind as we get there," he said.
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