Market Insider

Published: Friday, 2 Oct 2009 | 6:52 PM ET

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Uneven economic news is spooking stocks this October, but third quarter earnings could be one factor that helps keep the market's 7-month rally intact.

Expect the going to be choppy though.

Oliver Quillia for CNBC.com A New York Stock Exchange trader.

October markets are always haunted by a volatile past, and this market is showing it is sensitive to a string of weaker than expected economic data, including Friday's September jobs report. Mostly, Octobers are not terrible, but some of the worst crashes have happened in October. Historically, Octobers have been positive about two-thirds of the time when they follow a positive September.

In the week ahead, there is little economic data, so commentary from companies ahead of third quarter earnings reports will carry extra weight. Alcoa

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[AA  Loading...      ()   ] releases its earnings Wednesday after the bell, kicking off third quarter reporting season, but the big rush of quarterly reports does not start until the following week. Important also will be chain stores' September sales reports on Thursday.

There are also Fed speakers to watch, and the Treasury holds nearly $80 billion in coupon auctions. Key to stocks will also be the behavior of the dollar, which could be impacted by this weekend's G-7 meeting.

Traders are also watching the market's ability to endure a choppy patch after its 50 percent plus run. Traders say they are encouraged by the willingness of investors to buy dips, like Friday when stocks looked set for a sharp selloff after September's jobs report showed a surprisingly large loss of 263,000 non farm payrolls. The market ended modestly lower after trading in positive territory part of the day.

David Kotok, for one, said he became fully invested in the stock market after the jobs report because it is clear the Fed will continue its easing stance, and it's possible there could even be more fiscal stimulus from Washington to help the economy.

"A 3 to 7 percent correction in an ongoing upward phase is normal, and we just had it," said Kotok, chairman and chief investment officer of Cumberland Advisors. He said he is considering raising his forecast for the S&P, which is now a range of 1200 to 1250 by early next year.

Stocks ended the week about 2 percent lower in the biggest drop since the week of July 2. The Dow finished the down 177 at 9487, while the S&P 500 was down 19 at 1025, both 1.8 percent lower. Nasdaq fell 2 percent to 2048. The dollar meanwhile firmed, while gold and oil both rose on the week.

The dollar ended the week at $1.4571 per euro, ending 0.9 percent higher against the euro and 0.3 percent higher against a basket of currencies.

"I think you do need to focus on the dollar here. We get feedback from other markets that they're watching the dollar, and the dollar has been leading lately in the turns of the stock market," said Brian Dolan of Forex.com.

Treasury prices rose in the past week, sending yields lower. The 10-year was at 3.23 percent, and the 2-year was at 0.889 percent.

Whither Stocks

BlackRock vice chairman Robert Doll said the batch of weaker than expected data is causing some investors to take profits, and it may make the market a little rocky. "I think choppy.That's better than scary," said Doll, who said he's been more focused on defensive stocks for the past month.

"Regarding the third quarter, it's going to be hot and heavy soon. My guess is we will get, like the second quarter, a fair number of positive surprises, but what we are going to need to see is not just cost cutting but also some revenue growth. My guess is we'll get some. It won't be great, but it'll be enough to say we're heading in the right direction," he said.

Andrew Burkly, market strategist at Brown Brothers Harriman, said he has not seen any major technical damage to the market during the sell off.

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"I'm still constructive overall. I think it is a short term pause. It feels to me more of what we went through over the summer before we went through earnings season," he said. "I think we'll get those upside surprises and that's likely to send the market higher again."

"I think it'll be a little choppy, maybe a little more shorter term risk in the S&P, maybe down to the 1000 level. But by the end of October, we may be making new highs or challenging the highs," he said. "So far, I think we're down about 5 percent...the worst one we saw was during the summer, we were down about 9 percent."

Earnings for S&P 500 companies are expected to fall about 24.8 percent in the third quarter. In the second quarter, 73 percent of the S&P saw upside surprises. For the most part, analysts don't expect as many positive surprises in the third quarter.

"You have to trade up to quality. You've got to own companies that have cleaner balance sheets, less cyclicality," said Doll in a phone interview. He currently likes heath care and technology. "The initial rally off the bear market lows was all about low quality, and low quality got ahead of itself," he said.

"I firmly believe the recession is over, but I also believe the recovery is going to be kind of slow. It just means you have to be more careful," said Doll. He said he is maintaining his year end target of 1000 to 1050 on the S&P 500.

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