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While Wednesday's market promises to be a one-track focus on the start of the 3rd quarter earnings season, there are some important economic releases out on Thursday for which investors may want to position. Initial claims and the trade balance data are both released before the market opens and have the potential to take the wind out of the market's reason gains. Investors may want to look to defensive names or those with seasonal support to protect against a market selloff.

A lower unemployment rate belies a go-nowhere labor market

Initial claims for unemployment benefits is released at 8:30am and is expected to increase slightly to 370,000 from an upwardly revised 363,000 in the prior week. The risk is to a higher report in claims due to a drop in business activity in the face of uncertainty over fiscal spending and taxes going into next year. While few expect the government to allow the entire $600 billion of estimated spending and tax effects to hit the economy, employers have little reason to increase production before next year.

The market is less likely to react to a surprise drop in claims than a report that comes closer to the important 400,000 mark signifying labor market contraction. Despite the political attention given to the drop in the unemployment rate last week, the labor market does not look to do much but tread water until global growth picks up and fiscal uncertainty eases.

Traditional retailers like The Gap (GPS) could underperform the market as a weak labor market drives fears of a slow holiday shopping season. Shares of the specialty retailer have doubled in the last year and trade at 21 times trailing earnings, well above the four-year average of 16 times. Estimates for the third quarter have been increased by more than 12% over the last three months to $0.54 per share. Same-store sales growth of 6% beat expectations as net sales rose to $1.45 billion.

Amazon (AMZN) may actually be a safer bet in retail going into volatile employment reports and through the holiday shopping season. The $113 billion online retailer has seen a shift in sentiment lately with analysts reducing expectations for third quarter earnings to a loss of $0.08 per share from previous expectations for a gain of $0.13 per share. The quarterly loss would be the first in more than ten years and I would expect management to address the weakness with an aggressive plan.

While traditional retailers are expected to see softer demand this year with holiday sales growth at just 4.1%, online retailers could see sales increase as much as 12% over last year. Amazon still trades for an astonishing 316 times trailing earnings, but the stock has delivered with a compound annual return of 30% over the past ten years and the level of negative sentiment may provide a good opportunity.

The coming cliff is not fiscal, it's global

Trade numbers for August are released at 8:30am on Thursday with expectations for a further widening of the deficit to $44.0 billion. The deficit increased marginally to $42.0 billion in July but the June numbers were revised downward to $41.9 billion for relatively little change. Exports were boosted by higher crop prices due to the summer's drought but lower oil prices offset the effect and brought imports down to $225.3 billion.

The price of oil shot up by 9% to $114.57 by the end of August and will increase the cost of imports while exports will probably remain weak. Most of the Purchasing Managers' Indexes for key export markets reported a decline in business activity in September, including the two largest markets, Canada and Mexico. These point to a good chance that the deficit will surprise to greater export weakness and a wider deficit than the market anticipates.

Australia gave us a glimpse into Asian demand with last week's deficit of $2.03 billion on a decrease of 3% in exports versus expectations for a surplus of $685 billion. Further, July's numbers were revised down sharply to a $1.5 billion deficit versus the initial surplus of $556 million. European businesses have yet to show much enthusiasm for the region's new debt fix. If Asia, specifically China, continues to decelerate then U.S. export demand could detract significantly from GDP growth.

General Electric (GE) is closely related to the pace of general economic growth and could see losses on economic headline risk. GE Capital accounted for the largest portion of 2011 sales with 33% of the total while energy infrastructure (31%), aviation (13%), healthcare (13%), home & business solutions (6%) and transportation (4%) helped to diversify sales. Growth in the shares is limited by a relatively low 10.6% return on equity and a 53% payout ratio.

Besides market-related risks like the trade data the company could come under increased regulatory scrutiny if its finance division is deemed systemically important to the economy. Bloomberg reported last week that the Financial Stability Oversight Council has voted the company to the third, and final, round of evaluations for the designation. The move would likely increase the amount of capital needed to be held in reserve and could lower profitability.

I have been critical of Johnson & Johnson (JNJ) in the past for its issues with quality control and recalls. Though the McNeil OTC unit continues to operate under an FDA consent decree, the company looks to be addressing key issues. Revenue is well diversified with 37% from pharmaceutical sales, 40% from medical devices and 23% from the consumer segment. The company pays a 3.5% dividend and has grown revenue by a fairly stable 6% compound annual rate over the last ten years.

The company's experimental diabetes drug has had some success in lab studies and could beat competitors to reach the U.S. market. The market to treat diabetes reached $39.2 billion last year and is expected to cover a third of Americans by 2050. Stability in the company's core sales and the possible upside potential from new drugs may make JNJ a could stock to ride out market weakness.

Earnings could be weak, but the economy may prove to be the real headline risk

There should be no loss of analysis on earnings over the next few weeks but investors may want to look past corporate data to headline risk on the overall economy. Online retailers like Amazon should do relatively well against lowered expectations while traditional brick-and-mortar stores like The Gap may struggle. Companies that closely follow the economy like General Electric may face some headwinds on weak exports. Investors may want to position their portfolios in relatively safer names like Johnson & Johnson.

Source: Forget Earnings: 2 Stocks For Portfolio Protection And 2 Stocks To Avoid