The Coming Week: Caution Comes Back to the Booming Market

Wal-Mart and Home Depot are set to report earnings. CPI and industrial production data will be out later in the week.
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Wall Street's optimism may turn to caution in the coming week, now that the major indices are back at or above their pre-Sept. 11 levels.

The stampede higher has slowed in the past two weeks. Investors continue to bet on an economic recovery next year, but few people believe the current rally can keep going without a retest of the postattack lows. Some of those who bought equities in the aftermath of the World Trade Center and Pentagon disasters have started collecting profits, strategists said.

The major indices ended the week with gains. The

Dow Jones Industrial Average rose 3% to 9608, the

Nasdaq jumped 4.7% to 1828.5, and the

S&P 500 gained 3%.

"Somebody I spoke to yesterday called this a 'performance-chasing' market," said Tobias Levkovich, senior institutional U.S. equity market strategist at Salomon Smith Barney. "Most professional money managers underperformed the market on the way down. If they're also underperforming on the way up, then that's grounds for firing."

But even those who expect the market to keep rising say they're ready to take profits when the time is right.

Bernie Schaeffer, senior editor of Schaeffer's Investment Research, said he's impressed with the market's ability to rally so powerfully after hitting the Sept. 21 lows, and he likes what he sees in technical and sentiment indicators. But he's skeptical the move higher can last, particularly now that earnings season is on its last legs. Still, a few big names will have the chance to move equities one direction or the other this week.

"The market has room to rally, but I'm keeping an eye on the exit door," said Schaeffer. One red flag, he said, is that all of the market's gains have occurred during January, April and October -- the months that companies report their quarterly earnings. "The fact is that the earnings-reporting months have been the saving grace for the market this year," said Schaeffer. "If you factor those out from the S&P, you're down huge in those other months."

Hewlett-Packard

(HWP)

may report earnings next week, but Wall Street seems to be far more interested in the company's unpopular merger deal with

Compaq

(CPQ)

.

Dell

(DELL) - Get Report

is also on the calendar, along with several retailers, including

Home Depot

(HD) - Get Report

and

Wal-Mart

(WMT) - Get Report

.

Economic data will compete with the final earnings releases for Wall Street's attention. The October

retail sales report, to be released Wednesday, will be the big one everyone's watching, economists said.

On average, economists are expecting 2% growth overall, and just 0.1% growth excluding automobiles, according to

Reuters

consensus forecasts. Automobile sales have been booming in recent months, mostly because of the 0% financing deals carmakers are offering consumers. But last week's chain-store sales came in better than expected, and economists want to see if consumers are actually buying something other than cars.

"We would want to see if there's any strength outside of the autos," said Bruce Kasriel, chief U.S. economist at Northern Trust. "Whether those chain-store sales translate into anything in the ex-auto sector, whether people went out and started drinking a lot again, in bars and taverns."

Kasriel said the October car sales were still a good sign for consumer spending. "While the financing rate is zero, that doesn't mean the same thing today as a year ago," he said. "In general, rates are lower so it's not as much of a bargain. And even if it's zero, you're still shelling out, or making a commitment to pay back, thousands and thousands of dollars. So I found that kind of encouraging in terms of what households are doing, rather than what they're saying."

Other reports to watch next week are the September

business inventories Thursday and the

consumer price index and

industrial production data Friday.

Industrial production is likely to be weak, as indicated by the October employment report. But the CPI shouldn't be as weak as the producer price index released Friday. While the PPI reflected the price drops caused by 0% financing, the CPI doesn't.

Meanwhile, Kasriel said deflation worries are probably misplaced. "We know the prices of a lot of goods are falling -- commodities, cars, effectively -- but in terms of consumer services, those are showing no real sign of letting up. Overall, I don't think there's deflation, and I don't think there's a real threat, as long as money supply keeps growing."

Fed Chairman

Alan Greenspan also makes an appearance next week, speaking before Congress in an address Wednesday. But it's unlikely Greenspan will reveal anything new.

Minutes from the Federal Open Market Committee's Oct. 2 meeting were released Thursday, and they suggested that the Fed could continue to cut interest rates in the coming months. The minutes showed the Fed continues to see considerable weakness in the economy and isn't worried about being able to reverse course on interest rates next year if and when that becomes necessary.

For now, investors, as they have been for months, will keep looking closely for anything that tells them they can keep buying. The other side of those transactions is ready to accommodate them.