New York Correspondent
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THE bulls took convincing control of Wall Street last week, as investors intent on getting in on the biggest two-week-long rally for the US stock market in nearly 10 years, put on their blinders to the multitude of potential negatives facing the economy and focused exclusively on the positives.
Analysts warned, however, that the result of that bullish sentiment will be even harder to replicate in the coming week.
'We've risen so far so fast in the last two weeks, that I'd have to think it will take some major positive catalyst to sustain a rally that's brought the market up nearly 12 per cent,' said John O'Donoghue, chief equity trader at SG Cowen & Company. 'This is the week I think we see gravity pull stocks back down to earth.'
That's not to say that there aren't enough potential positive catalysts coming up this week to sustain the bullish sentiment. Between second-quarter earnings season embarking upon its busiest week and several key economic data reports, money managers who have remained on the sidelines in cash in the last two weeks may feel compelled to get on the bandwagon.
'Nobody wants to look like they missed out on the meat of a rally. It's one thing to miss the early stages of it, but now you get to the point of really falling very far behind the competition in returns for the year if you aren't invested in the stock market at this point,' said Mr O'Donoghue.
'If we get enough good news from either the economy or corporate earnings reports, it might just draw in those who've been reluctant to take their money out of short-term holdings.'
But money manager Hugh Johnson, president and chief investment strategist at Johnson Illington Advisors, thinks that while the overall trend is up for the stock market, there could be a pullback in the face of poor results and gloomy outlooks from bellwethers Microsoft, American Express and Amazon.
'So long as earnings hold up the pace they've set thus far, with the market's focus remaining on earnings, we could see another supportive week for sentiment and thus for stocks,' he said.
'But once we get out of earnings season, a pullback seems inevitable given how far we've climbed.'
Some traders are calling investors' ability to shrug off the late spate of worrisome earnings resilience rather than complacence, and note that the significant drop in the Chicago Options Exchange Volatility Index, known as the VIX, or simply as the Fear Index, is a sign of renewed stability in the market rather than excessive greed.
Last Friday, the Dow Jones Industrials clawed its way back from early losses to finish the day with a 24 point, or 0.26 per cent gain, to close at 9,093.
The S&P 500 edged out a slim three-point, 0.3 per cent advance to end at 979.3. The Nasdaq Composite, however, could not overcome the poor earnings results from two of its major companies, Microsoft and Amazon, and declined 7.64 points, or 0.4 per cent, to 1,966.
For the week, however, Nasdaq was the best performer of the three major US market gauges, registering a 4.2 per cent gain. The Dow added 4 per cent in climbing back above the 9,000 mark for the first time since the first days of January, and the S&P 500 picked up 4.1 per cent on the week, to climb to its highest point since last November.
Despite the major earnings slips by Microsoft and Amex, the 500 companies on the S&P maintained their estimate-beating pace from the previous week. Some 77 per cent of the 181 companies reporting quarterly results thus far have beaten consensus estimates - and have done so by a margin of nearly 19 per cent better than the 36 per cent decrease that analysts were expecting.
Perhaps even more importantly, analysts said, companies are issuing guidance for succeeding quarters for the first time this year. 'That's given a tremendous boost to the markets, because these companies are sending out the message they've finally got some clarity on how and when their bottom lines will recover,' said Mr O'Donoghue.
The 146 S&P 500 companies and five Dow components that are expected to release results this week will have to match those numbers if stocks are to keep their gains of the past two weeks.
Biotech giant Amgen, Honeywell International and Verizon Communications are today's biggest headliners. Tomorrow's earnings calendar features Viacom, US Steel and Office Depot.
On Wednesday, the docket includes Aetna, Coca-Cola Enterprises, General Dynamics, Hess Oil, Moody's, Sprint, Time Warner, and Walt Disney.
In the spotlight on Thursday will be Cigna Insurance, Colgate, Goodyear, Kellogg, MetLife, MasterCard, and Motorola. Friday features Scana, Travelers, and Exxon Mobil.
The economic calendar may very well prove to be just as important to investors as the earnings calendar this week. Analysts mentioned tomorrow's consumer confidence index and Wednesday's durable goods report as especially important as investors seek assurance that the economy continues on course to climb out a recession before the end of the year.
But the biggest economic release of the week occurs on Friday, when real gross domestic product for the second quarter is scheduled to be reported before the opening bell. The employment cost index for the second quarter, another important gauge for the economy's recovery, is also due to be released that morning.
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