What a Week: Desperately Seeking Skepticism

SAN FRANCISCO -- Sometimes it's better to be at the beach. Why? Because the action is so painful, at least for those who are long. Such was the case the week of July 24.

Other times, it's better to be at the beach because the action is tame. Such was the case in the week just past.

That's not to say the week just past was inconsequential. The moves weren't overwhelming, but the simple fact that the major proxies stemmed the vicious losses of the prior week was significant.

For the week, the Dow Jones Industrial Average rose 2.4%, the Nasdaq Composite Index and S&P 500 gained about 3% each, while the Russell 2000 climbed 2.7%.

When the week began, you'll recall, market players were on high alert for more weakness in the Nasdaq. The talk was of a possible return to the index's May lows around 3164. But those fears were confounded Monday -- and market players were grateful to see some green on their screens, regardless of whether it was caused by month-end considerations or dead cat bounces.

Strength in chip stocks such as PMC Sierra (PMCS) helped the Comp jump 2.8%. Blue-chip proxies also rose but the advance was restrained by weakness in retailers such as Wal-Mart (WMT), a trend that would persist throughout the week.

Tuesday brought about a reversal in leadership, as tech stocks stumbled, while defensive groups such as consumer staples and utilities rallied.

A record close for the Dow Jones Utility Average -- a proxy for interest rates -- and a relatively benign report by the National Association of Purchase Managers raised expectations the Federal Reserve will not raise interest rates at its Aug. 22 meeting. That sentiment would gain credence as the week progressed.

Blue-chips lead again Wednesday, and the Utility Average continued its record-setting run. IBM (IBM)and Hewlett-Packard (HWP) helped the Dow rise 0.8% but critical comments about Dell (DELL) and rumors of a pending earnings shortfall at Cisco (CSCO) kept the Comp under pressure.

The pressure intensified Thursday morning as cautious comments about Motorola (MOT) and a profit warning by Kulicke & Soffa (KLIC) sent wireless and chip-related stocks reeling.

Blue-chip proxies followed the Nasdaq lower and mounting losses had investors praying for salvation. Prayers that were answered by resurgent tech bellwethers such as Cisco and rallying financials, which together helped deliver a remarkable intraday reversal. After trading as low as 3521, the Comp recovered to close up 2.8% at 3760. The Dow and S&P 500 also finished well off their morning lows.

Overshadowed by the remarkable turnaround was continued weakness in the beleaguered retailers, following a profit warning by Gap (GPS) and reports by several companies of disappointing same-store sales . For the week, the S&P Retail Index fell 4.3%.

Benign Data, Muted Reaction

Thursday's turnaround came amid a growing expectation that Friday's employment report would prove tame. The expectation proved accurate, as the jobs report -- while mixed -- provided more fodder for the argument the Fed will not tighten later this month.

Yet market proxies were unable to sustain their initial enthusiasm Friday and closed with modest gains.

Traders noted many institutional investors remain sidelined despite the apparently favorable economic news. That's partially due to seasonal factors but also because they're grappling with whether a slowing economy is positive, given rising concerns about future corporate profits.

Despite the endless focus on Fed policy (guilty as charged) the "biggest driver" of stock prices is expectations for future growth, explained one hedge-fund manager (who shall remain nameless), in a recent email exchange.

"Even though the most recent quarterly reports were pretty good, almost every single company -- especially tech -- is warning that [growth in] the next and future quarters will be slowing down," he wrote. "These stocks have been -- and some still are -- priced to perfection. Things could get real ugly."

To say every single company has warned or guided estimates lower is a stretch. The point is enough leadership names have issued cautious comments to keep Wall Street on edge and the upside limited for the foreseeable future.

But Alan Skrainka, chief market strategist at Edward Jones in St. Louis, said the growing uncertainty about earnings is why he's getting more optimistic, about tech in particular.

On Friday, Skrainka upped his recommended allocation in tech stocks to 22% from 20%, adding Texas Instruments (TXN) to his model portfolio and upgrading Qualcomm (QCOM) to buy. He also continues to recommend Microsoft (MSFT).

However modest, the switch marks Skrainka's first upgrade of tech since he turned bearish on the group in March. A timely call, for sure.

"It's very encouraging for us to hear people start to recommend defensive stocks, where we've been since March," he said. "We're getting some real fear in the marketplace -- conditions we feel are more conducive to better performance from tech in the months ahead."

Believing the key themes for the coming months will be a slowing economy, falling oil prices and falling interest rates, the strategist also recommends health care stocks such as Johnson & Johnson (JNJ) and Medtronic (MDT), as well as financials American International Group (AIG) and State Street (STT).

Edward Jones has done no underwriting for any of the aforementioned.

So is there too much skepticism about tech profits, as Skrainka believes? Or not enough, as the hedge-fund manager contends?

Cisco's earnings and conference call on Aug. 8 may determine which argument wins out. Any note of caution from that tech bellwether, and the "dog days" of August will take on a whole new meaning. But positive comments from the networking giant could inspire more impressive gains than those registered in the week just past.

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