rally since july:almost entirely short covering, page-4

U.S. stocks seen rising, but ceiling may greet gains
Earnings to remain the driver; investors will closely watch inflation data
By Carla Mozee, MarketWatch
Last Update: 12:29 PM ET Oct 14, 2006


SAN FRANCISCO (MarketWatch) -- U.S. stocks are expected to rise next week as projections for double-digit quarterly earnings growth remain intact, but any gains will be capped as stocks are confronted by key resistance levels.
Inflation data for September will have a bearing, too. The reports could start a rally or spur a decline, depending on how much fuel they offer the Federal Reserve when it meets to decide on interest rates later this month.
"The path of least resistance right now, particularly with large-cap stocks, is up," said Mike Holland, fund manager of Holland Balanced Fund. "The valuation of the large-cap stocks that are in the Dow, for example, are still reasonable relative to inflation and interest rates."
Stocks have had a strong run in the past week with the Dow Jones Industrial Average ($INDU : Dow Jones Industrial Average Last:11,960.51, +12.81, +0.1%) closing at record levels three times and the Nasdaq Composite Index ($COMPQ : Nasdaq Composite Index
Last: 2,357.29, +11.11, +0.5%) surpassing its best closing level in five months.
The Dow has gained 7.8% since the start of the third quarter. The Nasdaq has added 8.9% and the S&P 500 has risen 8.4%.
Earnings will continue to be the big driver for equities and "more specifically, guidance and what the companies are saying about the prospects for the fourth quarter and for the first quarter of [next year]," said Stephen Sachs, head of trading at Rydex Investments.
Sachs, like Holland, expects to see another climb in stocks.
The market is entering the busiest two weeks of the earnings season. The lineup for next week includes Intel Corp. (INTC : Intel Corporation, IBM (IBM : International Business Machines, 3M Co. , Google Inc. , Johnson & Johnson , Coca-Cola Co.

"We're at a critical crossroads here. If we're going to keep this rally going, we're going to need to see that guidance from Corporate America very strong," said Sachs.
So far, companies are showing strength in their third-quarter results, said John Butters, senior research analyst at Thomson Financial.
"It's been a fairly positive quarter in terms of pre-announcements," he said.
Thomson's negative-to-positive ratio, or the ratio of warnings to increased forecasts, for the S&P 500 stood at 1.9 as of Thursday. The average ratio is 2.0. The lower the ratio the better, he said, and added that the ratio has improved from two weeks ago when it was 2.4.
McDonald's Corp. , BMC Software Inc., Convergys Corp. and CVS Corp. were S&P 500 constituents that raised their forecasts this week.
The growth rate for third-quarter earnings remains at 14%, said Butters. The materials sectors is expected to have the highest growth rate at 44% -- even with the recent decline in commodity prices -- because of weaker year-ago comparisons.
The financial sector is expected to show growth of 29% and to drive overall earnings due to strength from property/casualty insurers and other insurers that provide multiple lines of coverage.
"A lot of that is due to easy comparisons from a year ago when it was a difficult hurricane season and the earnings were not good," said Butters.
Financial and insurance industry heavyweights Merrill Lynch & Co. and Allstate Corp. are on the earnings docket next week. See more on Merrill Lynch. Read insurance earnings preview.
Inflation focus; technical resistance
Investors will also keep a close eye on government figures on producer and consumer prices next week, when the Labor Department releases its data on Tuesday and Wednesday.
"The inflation data from August was really tame...and if inflation were to start picking up again, that may lead the Fed to start raising interest rates higher which obviously would have an effect on equities," said Sachs.
The September producer price index is expected to post a decline of 0.7%, compared with a 0.1% increase in August, according to a survey of economists by MarketWatch. Excluding food and energy prices, the PPI is seen increasing 0.2% vs. a 0.4% increase.
Economists expect the consumer price index to decline 0.3% compared with an increase of 0.2% in August. If stripped of food and energy prices, the CPI is seen unchanged at 0.2%.
A number of Fed officials this week cautioned that the central bank is still worried about inflation. Chicago Federal Reserve Bank President Michael Moskow and Richmond Federal Reserve Bank President Jeffrey Lacker, the lone policymaker to favor higher rates at the Fed's last two meetings, both said more interest-rate hikes may be in store if inflation holds at its current level of 2.5% on an annual basis.
San Francisco Federal Reserve President Janet Yellen said the current pause in rate increases "makes sense" to her as policymakers study more data. However, she said the effects of the Fed's 17 consecutive rate hikes haven't yet been felt and "are probably still in the pipeline."

Additionally, policymakers insisted that a warning about future rates increases be included in the minutes of the central bank's meeting in September. The minutes were released on Wednesday. See The Fed column.
Holland said there's a possibility of a limited market decline if the inflation numbers are higher than expected and reignite concerns that the central bank will "tighten too much and raise rates to a level where they harm the economy."
Sachs also sees a limited decline if the inflation figures come in too high for the market's taste because the trend in equities has been to push past negative news.
"While I completely disagree with the mentality...the market has done a very good job of shrugging off bad news and uncertainty," he said.
Mark Arbeter, chief technical analyst at Standard & Poor's, expects a small pullback in the market next week because the major indexes have been overbought on a daily basis during the past week. They are also facing important areas of resistance, he said.
The Nasdaq could have trouble bypassing its April highs around 2,371. The S&P 500 on Friday managed to break through its rough patch at 1,360, but Arbeter will keep watch since the index has hit that level twice in 2005 and once in May and each time has backed off from it.
As for the Dow Jones Industrial Average ($INDU : Dow Jones Industrial Average
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4:30pm 10/13/2006

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$INDU11,960.51, +12.81, +0.1%) , the index could experience bumps during its ride to the 12,000 level, he said.
"Many times when indexes hit these big round numbers, they do have problems going through them on the first attempt. It's a psychological resistance level."
However, after a slight retracement Arbeter expects the major indexes to resume their march toward fresh highs.
"The market has surprised me. I didn't think it would be this strong this fast, especially during what is normally a seasonally weak time for stocks. The typical cycles that usually work are not working right now."
Dow hits new record; earnings list grows
The Dow overcame weakness from member companies General Electric Co. (GE : General Electric Company
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GE35.98, -0.24, -0.7%) and Home Depot Inc. (HD : Home Depot, Inc.
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HD36.90, -1.00, -2.6%) on Friday to set its third record closing this week, at 11,960.51.
The Nasdaq rose 11.11 points to 2,357.29 and the S&P 500 added 2.79 points to 1,365.62. For the week, the Dow gained 0.9%, the Nasdaq rose 2.5% while the S&P 500 advanced 1.2%. Read Friday's Market Snapshot.
Long-term Treasury prices closed lower, sending yields higher, after a batch of economic reports showed strength in the economy. The benchmark 10-year Treasury note's yield ($TNX : CBOE 10-Year Treasury Yield Index
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$TNX48.06, +0.28, +0.6%) closed at 4.808%, up from 4.784% on Thursday. See Bond Report.
Crude futures finished at a four-session high at $58.87 a barrel. But prices ended the week 2% lower as details about the Organization of the Petroleum Exporting Countries' apparent plan to cut production were still unclear. Read Futures Movers.
Gold futures jumped $12 an ounce Friday to add nearly 3% for the week, with support from higher energy prices, reports of strong physical demand for the metal from India and heightened prospects for international sanctions against North Korea. Read Metals Stocks.
The U.S. dollar rallied to a new ten-month high against the yen and three-month high versus the euro. See Currencies column.
Three of the biggest Internet companies will post earnings next week, beginning with Yahoo Inc. (YHOO : Yahoo! Inc.
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YHOO24.42, +0.30, +1.2%) on Tuesday followed by Google and eBay Inc. (EBAY : ebay inc com
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EBAY29.75, +0.07, +0.2%) on Thursday. Google is expected to report another strong surge in quarterly results due to growth in Internet search advertising, but the view on the other Net bellwethers is mixed after recent stumbles at those companies. See full story.
Apple Computer Inc. (AAPL : Apple Computer, Inc.
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AAPL75.02, -0.24, -0.3%) is expected to post another quarter of double-digit profit and revenue growth driven by iPod sales. Results are due Wednesday. See full story.
Bank of America Corp. (BAC : bank of america corporation com
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BAC54.39, +0.13, +0.2%) and JP Morgan Chase (JPM : jp morgan chase & co com
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JPM48.16, -0.10, -0.2%) are expected to post double-digit annual growth even if their performance is weaker compared with the previous quarter. See banking preview.
United States Steel Corp. (X : united states stl corp new com
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X65.44, +0.77, +1.2%) and other steel producers will unveil results. The companies' earnings should increase despite concerns about an emerging glut. See full story.
UnitedHealth Group Inc. (UNH : unitedhealth group inc com
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UNH48.75, -0.87, -1.8%) will jumpstart results for the managed care industry on Thursday. Read preview.
Results are also due from American Airlines' parent AMR Corp. (AMR : AMR Corporation
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AMR24.95, -0.94, -3.6%) , JetBlue Airways Corp. (JBLU : jetblue awys corp com
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JBLU10.14, -0.22, -2.1%) and Southwest Airlines Co. (LUV : Southwest Airlines Co.
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LUV16.44, -0.34, -2.0%) . Read preview for airlines.