So what could stop this rally?resistance at 1,127 and 1,130 on the Standard & Poor's 500 ($INX), what could prevent this rally from running straight through September (historically the worst month for stocks, going back to 1928) into October (historically the second-worst month for stocks), then finishing 2010 with an end-of-the-year rally?
In other words, what should you be afraid of -- and when?
But probably not in the way -- or with the timing -- that you would expect.
Instead, I'm worried that the stall will come before earnings season starts, with investors deciding to take their good September-rally profits and avoid the risk of disappointing earnings. If I'm right about that timing, stocks might actually be ready to resume their rally around Oct. 20 -- after the dip -- as earnings season ends.
(And that depends, of course, on what the polls say then about the November elections. Polls that show a Republican runaway will leave my estimate of timing intact. Polls that show the Democrats closing in could delay the start of any rally. Wall Street, if you haven't noticed, is rooting -- and voting with its campaign contributions -- for Republican victories in November.)
Time to take profits?Let me explain the logic of that timing. Assume that you're an investor looking at gains like these (and I hope you are) from the Aug. 26 (or thereabouts) low:
- Mining-equipment-maker , up 30.4% as of Sept. 22.
- IPod-, iPhone- and iPad-maker , up 19.4%.
- Copper and gold producer , up 27.5%.
- Truck-engine-maker , up 22.6%.
There's even been a good rally in some of the market's most beaten-up stocks. Gulf of Mexico disaster stockgained 17% from Aug. 26 to Sept. 22.
So what are you thinking as earnings season approaches?
You're thinking, I've had a big gain. Should I let it ride and bet on earnings season delivering an upside surprise?
In many cases, an earnings surprise is what you'll need to lift shares after this rally. The consensus is, in many cases, already built into the stock price. After all, Wall Street analysts have had months to tune and fine-tune their estimates. And in these days, when investors can get analyst estimates from everybody from online brokers to CNBC to MSN Money and Yahoo Finance, these numbers aren't exactly secret.
So "everybody" knows that Wall Street expects Apple to report fiscal-fourth-quarter earnings of $3.97 a share Oct. 19 (the date is unconfirmed). That would be earnings growth of 118% from the $1.82 in earnings per share reported for the company's fourth quarter of 2009.
Even for Apple, significantly beating an earnings increase of 118% isn't easy. That's a bar that's likely to make some investors nervous and willing to take profits before the actual earnings report comes out.