Week Ahead: Obama Rally or Earnings Distress?

Stocks will struggle with a heavy dose of bad earnings news that could dash investor hopes for an Obama rally in the week ahead.

Photo By: Elizabeth Cromwell

Companies reporting range from health care heavyweight Johnson and Johnson to IBM , Microsoft , United Technologies and General Electric .

Washington though will be the center of attention for part of the week, as Barack Obama is sworn in as President on Tuesday.

Focus will also be on the government's bail out of the financial system, following another week of drama in the banking sector which saw financial behemoth Citigroup split in two and Bank of America take more funds and a new government backstop. Government officials are now considering an "aggregator" bank to hold the bad assets on bank balance sheets.

The Senate hearing on Timothy Geithner's confirmation as Treasury Secretary will also be closely watched. While he is expected to be confirmed, the market could swoon if the allegations about his oversight on tax payments worsen or if he is rejected.

Traders have been hoping for a bounce around the inauguration Tuesday but new troubles in the banking sector pressured stocks in the past week. The stock market is closed Monday for the Martin Luther King holiday.

"The earnings are going to bad," said James Paulsen of Wells Capital Management. "I'm a little worried. If we got a few in a row that were much worse than expected that could bring a test of the lows."

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Paulsen, though, said the arrival of the new Administration could bring some hopefulness to investors, even if short-lived. "A rousing Kennedy-like speech, the big crowds and unity in D.C., could give a sense of change and better expectations. At the margin, it could help," said Paulsen.

Kevin Ferry of Cronus Futures Management said he had expected stocks to sell off into next week and then rally. "The difference between today's close and yesterday's low we think is where the bottom is going to be fought," he said Friday. That would be a range between 813 on the S&P and 850.

"That would be a great place for the market to try to do an Obama rally," he said.

Fear of Financials

In the past week, the Dow fell 317 points, or another 3.7 percent to a level of 8281. The S&P was down 4.5 percent to 850, and the Nasdaq lost 2.7 percent to 1529.

Financials were the biggest losers, with the S&P financial sector down a whopping 16.5 percent. Industrials were the second worst performers, off 6.7 percent, and telecoms, down 5.7 percent. The best performing sector was health care, off 0.25 percent.

The fear is unlikely to fade much by the start of the week. U.K. banks were in the rumor mill Friday. A meeting between U.K. Prime Minister Gordon Brown, his finance minister and the head of the Bank of England Friday helped add to speculation that British authorities would take further extraordinary actions to force bank lending. There were news reports another meeting would be held by officials Sunday.

Credit Crunch

The closely watched London Interbank Offered Rate (Libor) rates have been a barometer for improvement in the credit markets.

This past week the steadily progressing downward move in the three-month Libor reversed slightly.

"Obviously it is consistent with the move down in financials," said Jim Caron, head of global interest-rate strategy at Morgan Stanley. "Let's not forget that three month Libor came in quite a bit more than most people had expected."

Caron said it is moving with market sentiment which switched from pessimism in November, to optimism in December and early January.

"We've now moved to realism, as I call it," he said.

The move higher in the Libor rate is temporary, and the government's back stops should help the banking sector continue to improve, he said.

"They are all sort of backed by the government right now so the interbank lending markets have now much more government sponsorship today than they did a year ago, and I think people are willing to lend money ... Libor has scope to fall more," Caron said.

On the economic front, the National Association of Home Builders survey is reported Wednesday, and weekly jobless claims and housing starts are released Thursday. Weekly oil inventory data is reported Thursday this week.

Earnings Central

Banks, health care, tech and industrial companies all report in the four-day week. J&J reports Tuesday, and Abbott Labs Wednesday. Financial firms State Streetand TD Ameritrade report Tuesday, while Bank of New York and Key Corp report Thursday. Tech giant IBM reports Tuesday; Apple reports Wednesday, and Google and Microsoft release earnings Thursday. United Technologies' reporting date is Wednesday and GE, the parent of CNBC, is on Friday.

Inaugural History

On 14 inauguration days when the Dow was trading, dating back to 1929, the market finished down nine times. The losses though were mostly minor and the average for the Dow on all of those days was negative 0.38. When Ronald Reagan took office in 1981, the Dow had one of its worst inauguration day performances, finishing 2.09 percent lower. When Franklin Delano Roosevelt began his second term in 1937, the Dow rose 1.05 percent, its best inauguration performance.

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