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Investors zero in on Q4
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December 10, 2001: 5:13 p.m. ET
Earnings season is more than a month away, but the action has already started.
By Victoria Zunitch
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NEW YORK (CNN/Money) - This week could mark a decisive turn in the stock-market battle between those that believe the economy is coming to life, and those who don't. Tilting the balance will be more earnings previews --or "pre-announcements" -- of how the fourth quarter is shaping up.
So far the bulls have been winning, with the Dow Jones industrial average up a whopping 22 percent since Sept. 21. But there still is a sizeable bearish camp that thinks the market is taking too much of a leap of faith -- these bears want to see results.
"I think you're in a tug of war between those that are willing to bet on an economic recovery and those that think things have come too far too fast and are waiting to see fourth-quarter reports before moving stocks higher," says James Awad, chairman of Awad Asset Management.
With just a few weeks left in the fourth quarter, companies already have a pretty good idea of how things will turn out. Although most won't report final results until well into January or February, they will warn the market as soon as they can if it looks like they're going to miss -- or beat -- previously-announced performance goals.
Some of the highest-profile recent pre-announcements have leaned toward the positive side. On Monday, Cendant Corp. (CD: down $0.24 to $18.61, Research, Estimates) raised its earnings estimates for the next two quarters, and Delphi Automotive (DPH: down $0.76 to $13.39, Research, Estimates) raised its expectations for 2002.
JDS Uniphase (JDSU: down $0.58 to $9.95, Research, Estimates) warned Monday that sales would fall in the fourth quarter of 2001 from the third. But it also sees some light at the end of the tunnel, with sales expected to hit their low in the coming quarter and then rebound.
Last week brought fairly positive news, as well. On Dec. 6, Intel Corp. (INTC: down $0.29 to $32.95, Research, Estimates) raised its sales estimate for the current quarter, as did Advanced Micro Devices (AMD: down $0.35 to $17.50, Research, Estimates). AMD also said it would be profitable again in the second quarter of 2002. And two days earlier, Cisco Systems (CSCO: down $0.42 to $20.74, Research, Estimates) said that November orders were on track and that it has gained more market-share recently than ever before in its history.
Still, there's been negative news -- in fact, that's usually the case, according to First Call. So far in the fourth quarter, 45 percent of pre-announcements have been negative, 25 percent have been positive, and 29 percent have affirmed that results will be on target. At this point in last year's fourth quarter, 45 percent were negative, 22 percent were positive and 33 percent affirmed that performance would be on target.
Looking for a trend
The market may lack a decisive direction while it watches the corporate predictions roll in. Al Goldman, chief market strategist at A.G. Edwards, expects the market to churn around with a downside bias for the next three to five days. "It has been acting tired for 10 days now," he says. Then he expects it to rise in a traditional Santa Claus rally through the year-end and perhaps the first few days of the new year.
Awad thinks the market could move higher even if corporations preannounce news of mediocre fourth-quarter performance. Money managers have had a difficult time posting positive returns this year, and therefore might refrain from any selling that could drive the market lower.
David Briggs, head of equity trading at Federated Investors, has heard that money managers are looking for ways to avoid pushing the market lower. "Let's say a money manager wants to reduce a holding by 4 million shares. They're holding onto it right now because they don't want to depress the price of their remaining shares," he says. This could hold the market up for now but it could spell doom for January, he notes.
Awad agrees. "There could be a hangover in January," he says. 
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