Thursday Look Ahead: Wall Street Finds Some Supporters as Earnings Season Looms

Time will tell, and so might the earnings season.

Wall Street sign
Paul Giamou | Aurora | Getty Images
Wall Street sign

Wednesday's stock market pop was a hot air rally on moderate volume. The Dow rose 274 points, or 2.8 percent, to 10,018 in its third largest point gain for the year, while the S&P 500jumped 32 points, or 3.1 percent to 1060. The Nasdaq was also up 3.1 percent.

Some traders were encouraged by the gains but also cautious that the third up move in a 12-day stretch was the result of an oversold bounce that could quickly evaporate in the next volatile session. They also had no clear explanation for the rally, and attributed much of the move late in the day to computerized trading and some short-covering.

Traders and analysts have been pointing to the upcoming earnings as a catalyst either way for stocks. Earnings season kicks off Monday with Alcoaearnings. J.P. Morgan, General Electric, Inteland Googlealso report next week.

"I think we can make up some of the losses, but to get a real bull market going again, I think you're going to have to have some greater clarity on the earnings and general economic front," said Ed Keon, managing director and portfolio manager at Quantitative Management Associates.

Keon said he is more cautious than he had been, but he believes stocks still represent good value. "We're not bearish. We're closer to bench mark on risky assets than we were a month or two ago," he said. "We'll have a few good days, like today..but to get a sustained rally we 'we've got to get more clarity on where earnings are going."

"We're going to get some hard facts pretty soon, with the earnings season starting next week. The market is expecting fairly tepid guidance," he said.

Time to Buy?

Some pundits say it's time to buy the market, just as others warn of more downside volatility to come.

Doug Kass of Seabreeze Partners is one who thinks the market has seen the the lows of the year.

"About 16 months ago, I talked about a generational low in March of 2009, and I think now we have reached a ... low for the market for the year. We've been traveling a path of fear and we've begun to dramatically disconnect from fundamentals and importantly from other risk assets," said Kass on "Fast Money" Tuesday.

Jeff Kleintop, chief market strategist at LPL Financial, meanwhile, said in a note Wednesday morning that the market has been beaten down enough and that it was time to buy.

"The market environment that we forecast for 2010, consisting of low returns and high volatility, make watching overbought and oversold conditions the paramount technical indicators. Technical oversold conditions are now prompting us to recommend buying stocks," he wrote.

Kleintop also said the recent weakness in economic data appears to be a typical softening that happens about a year after the start of a recovery. "Last week's economic data that drove a 5 percent decline in the S&P 500 is being viewed as clear evidence of a failing recovery. However, it is actually typical of an economy transitioning from the first year of recovery to a multi-year period of sustainable growth," he wrote. He noted that in other soft spots in the past 60 years, consumer confidence declined by 13 points. (It was down 10 points last week from the month earlier level.)

He also points out that in these soft spots, ISM falls to the breakeven level of around 50. ISM, a measure of manufacturing strength, slipped to 56.4 last week from 60.4.

On the technical front, he said the S&P at 8 percent below its 200-day moving average was at a typical level for a market turning point, during an economic soft spot. The relative strength indicator fell to an oversold level of 30, and the percent of stocks making new 65-day lows crossed above 40 percent, the oversold level that has historically led to a rebound. Also, only about 4 percent of the S&P 500 were above their 50-day moving average, a rare and oversold condition, he wrote.

What to Watch

Thursday's markets will cue off the weekly jobless claims report at 8:30 a.m. Economists expect claims to total 460,000, down from last week's 472,000. The number will be closely watched, particularly after last week's rise in weekly claims and disappointing June employment report, which showed little private sector job creation.

Ahead of the New York open, the European Central Bankand Bank of Englandboth hold rate meetings. ECB President Jean-Claude Trichet is expected to speak.

Chain stores also report monthly sales Thursday, with many company releases coming ahead of the opening bell. The Thomson Reuters same stores sales index is expected to rise 3.2 percent, compared to last June's 4.9 percent decline. Department stores are expected to be the best performers, with a 5.1 percent rise in sales, followed by discount stores, up 3.6 percent.

The expectations for any measure of consumer behavior are generally weaker now, so better-than-expected sales reports could be a positive for the market. Retail stocks have been losers lately, and Family Dollar's earnings comment Wednesday did not help. Family Dollar forecast a lower-than-expected quarterly profit and said the environment was challenging.

One positive catalyst Wednesday was an earnings forecast from State Street, which helped drive financial stocks higher. The group finished up 4.4 percent, after State Street said it would see better than expected quarterly operating profits of $0.93 per share, on improved revenues of $2.2 billion.

Another factor was the calmer tone from Europe, where stocks rose as more information was made public about stress tests on European banks. The test results are now expected to be released July 23.

If the results are positive, that may also soothe markets.

"That would help but I don't think that's going to be enough to get things rolling," said Keon.

Payouts Could Pay Off

Keon pointed to an interesting comparison between stocks and Treasurys, which have been the beneficiary of investors seeking a safe haven for cash since the stock market sell off began.

He notes that the yield on the S&P 500 at 2.1 percent is not that much below the 7-year Treasury yield currently. "In 1953, for the first time, the dividend yield on stocks fell through the 10-year bond yield..people thought that was a terrible stock market," yet it ended up being the start of a good market period, he said.

"In the 1950s, companies paid out half their earnings in dividends. Now they only pay out 25 percent. By very old metrics, I think stocks represent good value. The question is: 'Are we going to see higher prices, higher valuations any time soon?'" he said.

Keon said dividend paying stocks typically outperform in poor markets, and there is a case to be made for companies to pay out more of their profits, as corporate America continues to build a huge cash hoard. Companies, he said, are being held back from spending and hiring by regulatory and economic uncertainty but they continue to stock pile cash.

"I would like to see companies adapt more aggressive dividend payments. I think that would help make stocks a more attractive class for baby boomers. Clearly, income is going to be a major need of people as they retire. If they raised to just a 3 percent yield...that would be the same as government bonds," he said. "In the long run, society can only succeed if it has capital to fund entrepreneurs and new business entities through equity investment.

To the extent people lost confidence in the market as a reasonable place to put money, a little bit higher dividends might help people to stick with stocks," he said.

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