Market Should Rally on Good Corporate Earnings

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Includes: AA, DIA, QQQ, SPY
by: Wall Street Strategies

I'm still surprised the market held up the way it did on Friday. I was tempted to write "pleasantly" surprised but I'm not sure to be honest. Of course I would love for the market to move up in a straight line, but that is unrealistic. I would love to not have to answer to why ideas are down even as the broad market is down. (Handholding is a critical component of our mission, but sometimes the fear expressed is as if companies are going out of business when it's just a pullback.)

But, the fact is that backing and filling is good for the market as it allows weak holdings to get out and more optimistic buyers to step in. Broad market pullbacks are also often the only way to get great stocks on sale.

That said, if the market just went straight up for the next year I wouldn't fret too much, so in the end, resolve displayed on Friday is a good thing but a 200-point drubbing wouldn't have been the end of the world.

Speaking of the end, three more banks bit the bullet over the weekend. The economic impact to the FDIC was minimal compared to other bank failures in recent weeks but the year to date tally is now 98 banks closed. Moreover, at $293.3 million it is a heavy toll for just 10 bank branches. The laws of creative destruction are at work as each branch will open today under new bank owners, which is the way it should be, but just how much more can the FDIC handle. I know smart people that say the agency has already run out of money. Look for this to be the big Main Street news story next Monday as it's almost certain the tally of closed banks will cross the century mark, which makes for perfect newspaper headlines. Perhaps the most important ingredient in the eventual economic recovery will be confidence by depositors that the FDIC is up to the task.

I actually believe this is one of the best run agencies in the government at the moment. The FDIC doesn't have time to ponder the problem and drag its feet. Every day the agency is finding banks to step up when other banks fail. The agency isn't making decisions based on politics of envy or potential vote count in the future. I bet if given the proper amount of time and authority the FDIC could piecemeal a too-big-to-fail bank.

Of course, that's not the topic of discussion these days as the agency is sure to have its hands full with the hundreds of banks everyone expects to bite the bullet over the next few years.

More Sobering Developments

For all of the resolve witnessed in the stock market on Friday the other news was, to borrow a word from the President, "sobering." The loss of the Olympics is nothing when we consider:

  • Iran has the data to build an atomic bomb right now
  • Eight U.S. soldiers killed in Afghanistan
  • We need 40,000 more troops to be successful in Afghanistan

I can only pray that the definition of success in war isn't altered like the definition of success in the economy. I don't want to hear about soldiers not killed in action like we hear about mythical jobs saved in the economy.

On my radio show "The Charles Payne Show" on KFI AM 640, Representative John Campbell of the 48th District in California told me there are 100 representatives in the House that want a single payer healthcare system that would make private healthcare illegal. That's frightening stuff to me, but it just goes to show how many of our representatives are prepared to throw in the towel on free market solutions. I consider it retreating from what made America the greatest country on the planet.

In addition, my other guests on the show this past Saturday, Representative Darrel Issa of the 49th District in California thinks we need tort reform and to stop the practice of defensive medicine. I learned there are many ideas on the topic floating around Capitol Hill that just aren't getting a fair hearing.

This Week

I think that the market can rally this week on good corporate earnings. Like I wrote last week, the inflection point could come with the release of results from Alcoa (NYSE:AA) on Wednesday. This time around, earnings have to beat on the top and bottom lines, right? It's not a rhetorical question because I was (pleasantly) surprised last earnings season when stocks soared on dubious results.

One of the reasons the market held on Friday was the lack of widespread panic. Despite the worries of some individual investors when the market dips, the smart players that bought stocks in the midst of shear terror aren't going to be swayed by minute to minute nuances or even the occasional pullback.

That might change if earnings are off big time and it appears there is no more room to cut costs (read: fire people). Then, there is guidance. With most economists looking for the third quarter to shape up positively, with GDP climbing significantly, the question is what are the assessments for the fourth quarter and fiscal year 2010. I hope we get clear trends and answers on these:

  • Demand
  • Pricing power
  • Access to capital
  • Capital expenditures
  • Commodities costs
  • Job cuts

Technical View

The Dow Jones Industrial Average is hanging right above its 50-day moving average, and this is a very important number. The index has made a series of higher highs and higher lows, and at the very least needs to hold above 9,300.0. Even if that level failed it wouldn't be the end of the world, but it's critical.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.