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Seeking to rally
Next week is key for stock market investors, with earnings and reads on GDP and housing on tap.
October 23, 2005: 8:29 AM EDT
By Alexandra Twin, CNN/Money staff writer

NEW YORK (CNN/Money) - Having been knocked down to potentially pivotal lows, the stock market in the week ahead could be primed for a big snap back rally. Maybe.

A tough early to mid October often leads to a bottom near the end of the month, according to the Stock Trader's Almanac, and that often sets stocks up for a stronger November.

The battering stocks have taken this month and the signs of the selling bottoming out last week give hope that such a trajectory may be in store for 2005.

But there are plenty of headwinds to challenge that, particularly next week, which brings key reads on the economy and earnings from roughly one-third of the S&P 500. There is also the issue of market psychology, which is pretty negative at the moment.

"There's the potential for a rally in the next few weeks because the market is extremely extended to the downside, and this is historically the place where momentum players would come in and do well," said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

"But I'm not seeing the rotations yet that would give me confidence that major players are taking money out of certain sectors and putting it elsewhere," he added.

Mendelsohn said it was concerning that the money going into financial, techs and other sectors has not been commensurate with the money recently coming out of oil and homebuilding -- 2005's big stock winners.

That hesitation likely relates to some of the broader issues that continue to dog stocks, including worries about inflation, higher interest rates and the threat of a slowing economy.

In particular, a possible economic slowdown is worrying markets, said Ned Riley, chief investment strategist at Riley Asset Management.

Because Federal Reserve officials have been fairly vocal about the threat of inflation, the market seems to understand and be aware of that issue, Riley said. "But the question is more about economic growth."

Next week brings reads on housing, consumer sentiment, durable goods orders, and most significantly, third-quarter gross domestic product growth. (For a preview of these reports, click here.)

The reports will address some of that concern about slowing economic growth. However, the reports mostly cover the period just after hurricanes Katrina and Rita, and are therefore not so relevant for a market looking beyond the third quarter.

A more likely catalyst for a potential bounce back next week could be the slew of earnings that are due, the analysts say.

3Q earnings on track

Around 30 percent of the S&P 500 is expected to report third-quarter results next week, with a heavy concentration of energy names, including Exxon Mobil. Among the tech standouts are and Microsoft. (For a preview of next week's key earnings, click here.)

Approximately 35 percent of the companies in the S&P 500 have already reported earnings. While there have been some notable misses so far, the results overall have been decent.

Reported earnings are currently showing a gain of 8.8 percent versus the same quarter a year ago, while blended earnings, which combine reported and expected results, are showing a gain of 15.1 percent, according to tracking firm Thomson Financial/First Call.

Although it's a bit early to discern trends, "what's interesting so far is that a higher percentage of companies have been beating estimates than in recent quarters," said Thomson Financial research analyst David Dropsey.

So far, 69 percent of reported earnings have come in better-than-expected, versus the historic average of 59 percent, Dropsey said.

However, that's been overshadowed by a number of high-profile companies warning about future quarters.

"It's not that the earnings we've seen so far have been bad," Mendelsohn added, "it's that you have companies like Pfizer saying they've lost visibility for 2006 and 2007 and maybe beyond that."

Last week Pfizer issued disappointing third-quarter results and pulled guidance for 2006 and 2007. The Dow slumped Friday partly due to Caterpillar's disappointing forecasts. Tech has had some misfires too, with eBay and Intel's forecast upsetting investors.

Next week's group of earnings could be more upbeat, Mendelsohn noted, due to the fact that so many energy companies are on tap.

As has been the case since the start of the third quarter, the energy sector remains primed to show the biggest year-over-year growth of the 10 main S&P sectors, said Thomson Financial's Dropsey. Energy earnings are currently expected to have jumped 70 percent from the same period a year ago.

On the opposite end of the spectrum is the materials sector, which is expected to show a decline of 8 percent from the same quarter last year. The decline is mostly due to tough comparisons to a particularly strong third-quarter last year.

Earnings to watch

Monday a.m.: Merck (Research) is expected to have earned 62 cents per share, according to a survey of analysts by First Call/Thomson Financial, versus 60 cents a year ago.

Monday p.m.: American Express (Research) is expected to have earned 74 cents per share, versus 69 cents a year ago; Texas Instruments (Research) is expected to have earned 39 cents per share, versus 32 cents a year ago.

Tuesday a.m.: DuPont (Research) is expected to have earned 27 cents per share, up from 25 cents a year ago; HCA (Research) likely earned 62 cents per share, analysts expect, versus 54 cents a year ago.

Tuesday p.m.: (Research) is expected to post earnings of 14 cents per share, versus 17 cents a year ago.

Wednesday a.m.: Boeing (Research) is expected to have earned 78 cents per share, versus 44 cents a year ago; Lucent Technologies (Research) is expected to have earned 5 cents per share versus 4 cents a year ago.

Wednesday p.m.: Corning (Research) is expected to report earnings of 21 cents per share, versus 14 cents a year ago.

Thursday a.m.: Dow Chemical (Research) is expected to have earned 77 cents per share, versus 65 cents a year ago; Exxon Mobil (Research) likely earned $1.36 per share, analysts expect, versus 96 cents a year ago; Verizon Communications (Research) is expected to have earned 64 cents, versus 65 cents a year ago.

Thursday p.m.: Microsoft (Research) is expected to report earnings of 34 cents per share, up from 32 cents a year ago.

Friday a.m.: Bristol-Myers Squibb (Research) is expected to have earned 33 cents per share, versus 44 cents a year ago.

Key economic reports

  • On Tuesday, the existing home sales report is due. Sales likely fell to a 7.20 million unit annualized rate, according to a consensus of economists surveyed by Sales stood at a 7.29 million unit rate in August.
  • The October read on consumer confidence, also due Tuesday, is expected to have risen to 90 in October from 86.6 in September.
  • September durable goods order are expected to have fallen 1 percent, according to forecasts, after rising 3.3 percent in August. That report is due Thursday.
  • New home sales, due Thursday, likely rose to a 1.250 million unit annualized rate in September, economists expect, from a 1.237 million unit annualized rate in August.
  • The first read on gross domestic product growth in the third quarter is due Friday. GDP is expected to have grown at a 3.5 percent annualized rate versus a 3.3 percent rate in the second quarter. The chain deflator -- the report's inflation component -- is expected to have grown at a 2.9 percent annualized rate, versus a 2.6 percent rate last quarter.
  • The revised read on October consumer sentiment from the University of Michigan is also due Friday. The sentiment index is expected to be revised up to 76.2 from an initial read of 75.4.
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