Jubak's Journal9/23/2010 9:52 PM ET

Be ready for the rally's end

September's big market move faces a few hurdles with earnings season closing in. Here's why it's likely to stall, how to tell if it is and how to prepare.

[Related content: Jim Jubak, Apple, Freeport McMoRan, stocks, Transocean]

By Jim Jubak

So what could stop this rally?

How earnings forecasts move stocks

Now that it has broken through 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?

Just one word. Are you listening, Benjamin? Earnings.

But probably not in the way -- or with the timing -- that you would expect.

I'm not worried about unexpectedly bad reports in the third-quarter earnings season that gets under way Oct. 7, when PepsiCo (PEP, news, msgs) and Alcoa (AA, news, msgs) will release their latest numbers. If that were the worry, I'd expect the rally to stall somewhere after earnings season started, on actual reports of bad news.

Find a broker and trade now

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 Joy Global (JOYG, news, msgs), up 30.4% as of Sept. 22.

IPod-, iPhone- and iPad-maker Apple (AAPL, news, msgs), up 19.4%.

Copper and gold producer Freeport McMoRan Copper & Gold (FCX, news, msgs), up 27.5%.

Truck-engine-maker Cummins (CMI, news, msgs), up 22.6%.

There's even been a good rally in some of the market's most beaten-up stocks. Gulf of Mexico disaster stock Transocean (RIG, news, msgs) gained 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.

Continued: It's not just hot stocks

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22Comments

Newest

10/13/2010 4:40 PM

The wealthy that pay most of all taxes won't stick around when the going gets tough!! Why should they-they've been demonized and will flee percecution?? They'll move money to emerging markets, move to tax friendly countries and let the rest of us figure out how to pay for monster government and overpromises to unions! Shouldn't be long now! How's your state budget looking??

Our gov is counting on/making decisions based on few changes FYI(-see projections!! Boomer will spike every unfunded entitlement and slow spending too ( 1 out of 4 of us FYI)! No bubble blowing bet will do the trick now-demographica and psychographics don't support it!! Cut spending now, or experience civil unrest you can't imagine! We'll have to raise some taxes too-it's too late!

0 1

spencerkat

9/26/2010 12:35 PM

CAN YOU TELL JUBAK IS SHORTING THE MARKET.

FOLKS, WANT TO TARGET SOMEONE WHO IS STUFFING HIS OWN WALLET BETTING THAT YOUR STOCK PORTFOLIO WILL CRASH AND BURN, GO NO FURTHER.

WORD OF ADVISE JIM, IF YOU DO NOT LIKE WHAT YOU SEE IN WALL STREET, THEN GET OUT, AND DO NOT OFFER AN OPINION NO ONE WANTS TO READ.

0 22

OGRE ALEX

9/25/2010 12:05 PM

Ah, the predicted rising market.

Does this mean the HINDENBURG OMEN is back in play again???

1 1

albioneast

9/25/2010 10:45 AM

Mr. Jubak specifically mentions using using stop losses as a way to protect gains. I had two positions, one in Pand G which was stopped out at 50 and Apple at 217, during the infamous flash crash.

Both stocks recovered in nanoseconds from these level and the money was stole from my account by my reckoning.

6 0

hsheboul

9/25/2010 5:34 AM

Yes, the 'global' economy, and yet the US one, both have little correlation with the current moves for the equity markets; as more and more companies are cutting costs to boost their earnings -- this for sure, is not a sign of a healthy economy.

Markets' events are no longer the major driving factor for most of these recent moves, esp. since April. Day traders, and proprietary trading firms have some major impacts; and hence, this has an explanation of why some of the bases of technical events have changed in trading software tools.

When looking closely to the charting software, the following are being noticed,

trading volumes are becoming less and less.
day's price ranges are very close, for many days for a specific time-frame, perhaps between 15 - 35 cents (large and mid cap)
For a given time-frame about 10 - 15 minutes, the charting lines are almost straight, within a range of +-2cents.

These were not occurred in the past.

The bottom line, discounted online brokers, day traders and proprietary trading firms are some of the 'new' factors that have some impacts that drive the current relatively-slow moves.

0 2

Frank Morton (Starlight19)

9/24/2010 10:59 PM

The market has little correlation with the real economy. Unemployment is about 15%,real wages are down, 40 million are in poverty while the gap between rich and poor is obscene and growing. If something isn't done to control the insane greed that's destroying us it want matter where the market is.

When middle class America is destroyed, the rich will have no one left to devour except each other. We are on a path to chaos. Socialism for the rich does not work and when the angry middle class finally realizes the are part of the masses being trickled on it will be to late.

11 8

urbanhiker

9/24/2010 5:37 PM

Hey Veritas, If you think so little of Jim, why are you on his website. Methinks you are a strong canidate for therapy based upon your strong and venomous comments.

13 3

veritasveritas

9/24/2010 5:14 PM

Jubak is an idiot. Always has been. He was on the dot com bandwagon. He cant tell up from down and never could. His comments are rubbish. You would be better off running in the opposite direction than following his lead. He is a fraud.

4 25

Rational Liberty

9/24/2010 3:51 PM

Cash is probably the worst place to take shelter or comfort right now. One would have to be insane to lock it away for future use at this point. How much more "quantitative easing" will it take before the paper is entirely worthless. You may as well just print your own money and stash it in your cookie jar - but then you'd just lose out on the value of stored cookies.

The "gold 'thing'" has been the only safe bet over the last decade. I feel quite comfortable trading in my paper for gold and silver. At least I know it has some real value. I have also been dumping my stocks for precious metal miners. These have been the best decisions I've made over the last few years.

I have no idea what the market will do in the near or long term, but I know gold and silver will continue to rise until we stop increasing our debt and money supply. That's as close to a guarantee as we can get.

2 15

Spinmister

9/24/2010 3:29 PM

as a broker you need to get the hell out of the market now....do NOT buy into the gold "thing". Save your cash in a safe (not in a matress or in a bank). The next wave is a commin'....commin' down the tracks (Johnny Cash).

these gains are NOT the sign of a healthy economy but one rather spinning helplessly out of control folks, just like Dorothy in Kanasas.

think "slow and steady" gains for a consistent period of time............................we see this and that my friends is a "sign" of gradual recovery but even then we will not be out of the woods just yet..............................

16 7

namelit

9/24/2010 2:03 PM

Let me tell you ; That it is all going to come crashing DOWN . The Dow Jones and GOLD are inflated by a minimum of 40% .

11 18

Correction261

9/24/2010 11:59 AM

I tried to link to last year's earnings call transcript, but MSN blocked it as spam. Instead I'll copy and paste:

'In terms of non-GAAP measures, adjusted sales totaled $12.25 billion for the September quarter, which was almost $2.4 billion higher than our reported revenue. Adjusted gross margin was $5.21 billion, which was almost $1.6 billion higher than our reported gross margin. And adjusted net income was $2.85 billion, or almost $1.2 billion higher than our reported net income.'

4 6

Correction261

9/24/2010 11:53 AM

I would just like to let you know that you are comparing Apple's GAAP revenues from last year, which had iPhone sales revenues (and profits) spread out over 8 quarters. When Apple reported their first fiscal quarter this year, in January, they changed their GAAP reporting to include iPhone revenues (and profits) up front. Makes sense since they receive the cash up front.

Apple's non-GAAP earnings from last year's quarter were $3.15, that is the previous year number that you should compare to for the upcoming quarter.

I wouldn't comment, but the 148% expected earnings increase number makes a large part of your article and is misguiding.

4 5

logan2007

9/24/2010 11:42 AM

The market is going to continue to go up as long as the Fed keeps buying treasuries and flooding the market with cheap money. That is what brought us back from the brink and it will also cause the next bubble. They hang their hat on the fact that the massive amounts of money they make out of thin air isn't "officially" in circulation. They claim its simply being used to prop up the banks capital positions, because their loan assets are overly devalued. The problem is they gave investment bankers access to 0% Fed funds. The market is going to be the first place we see inflation. The canary in the mineshaft....

22 7

Duckweiser

9/24/2010 10:59 AM

I am no financial guru but I can't be the only one thinking.....take the recent earnings(after today close) to safe harbor and then sit back wait for this next pullback and jump back cautiously for the end of year rally. Simulate same scenario even with a 401k to an extent.

14 10

apljak

9/24/2010 9:50 AM

What goes up, must come down, or does it? It will be interesting to see if growth and gains can continue at a moderate to slow pace. Holiday spending always shows an inflated gain and then a sharp loss, look to the median to make your decisions towards the next quarter. Good luck, but use your brain.

15 7

Roadhouse Blues

9/24/2010 9:35 AM

Now let's see, someone is trying to convince me that Corporate America, Wall Street and the GOPers are deliberately holding the economy back (check the article a couple days back about CEOs hating Obama) to the detriment of millions of Americans just to get their way in the November elections. C'mon, we haven't come to that in this wonderful country, now have we? This is America, and we have government of the people, right? I never trusted the DEMs (just look at their priorities, e.g., pushing for a path to citizenship for illegals instead of job growth for real American citizens, thank you Sen. Durbin), and now we have the GOPers in bed with the powerful wealthy, guess us Middle Class serfs don't count anymore, unless of course, we get smarter on how we vote, i.e., don't automatically think because some candidate is DEM or GOPer that they are the right choice, history shows otherwise. Get smart, America!!!!

34 35

rayinca

9/24/2010 8:58 AM

The banks have been cooking their books for 18 months. They mess around with their loss provisioning to hit an earnings number everyone likes to see. The truth is they are under-provisioning on a massive scale.

I don't understand how bank " earnings " can be an indicator for an equities market as busted as this one. We have now entered 20 consecutive weeks of mutual fund outflows, so the retail investor made a run for it.

Something is wrong in the capital markets' valuations.

26 6

exceo

9/24/2010 8:54 AM

Jubak is a sound financial writer with some fairly accurate projections, but I don't buy the scenario depicted in this article.

Until such time that someone can explain the reasons for the market to have an upswing in a traditionally bad month, I prefer to think that it indicates a pattern of gradual recovery. Most of the economic news is positive . There will always be pessimists

and those who can't accept the fact that the market has normal declines as well as upswings. At this point in time, I don't think that the usual "market factors" used as barometers mean very much and open to some wild personal interpretations .

26 14

STRYKER 8X79

9/24/2010 8:51 AM

We must Vote out all the old if possible and vote in the new on both sides if possible and Demo's remenber your getting to come closer to voting your self out of free lunchs, food stamps and money when the baby boomers are out of the picture. Who will feed you. WHEN JOHNNY COMES MARCHING HOME.

14 29

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Jubak's Journal9/23/2010 9:52 PM ET

Be ready for the rally's end

Time to take profits?

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