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Rally May Have a Little More Steam

The most likely catalyst for a market change won't come until mid-July, when companies give second-half guidance, some say.

For the past few months, the market has seemed indestructible. So can it survive the earnings preannouncement season? Some analysts say yes.

While any number of factors could potentially derail the rally -- including higher oil prices, a weak preannouncement and earnings season, or simply an evaporation of buying power -- several analysts believe that there is enough liquidity sloshing around and enough momentum to send the averages higher for another few weeks. The most likely catalyst for a market change, they say, could be earnings announcements in mid-July, when companies give guidance on the second half.

Stocks have steamrolled ahead recently despite a criminal probe and

Securities and Exchange Commission

investigation into

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, an indictment for Martha Stewart, questions about


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accounting, less-than-stellar economic news, and sales warnings from

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and others.

"One thing we've learned in this business is don't sell strength, because you never know how long it's going to last," said John Bollinger, president of Bollinger Capital.

Only when the market looks like it is starting to fade should investors pull out, and so far, he said, there has been scant evidence of that happening. Technical indicators such as advance/decline lines and new highs to new lows are holding up well, and the rally continues to be broad-based. But more important, investors' response to bad news has changed.

"From early 2000 to the end of 2002, bad news was emphasized and good news was ignored; now we've switched," Bollinger said. "This is the signature of a basic change in market psychology."

James Paulsen, chief investment strategist at Wells Capital Management, said investors shouldn't keep waiting around for a big correction that might not come in the near future. "Sneakily, a lot of the market is moving up while everyone's debating whether this move is real," he said. "By the time you determine it is, it'll be over."

Paulsen said there is always a litany of reasons why the market can't go up, but he believes there's an equally long list as to why it should. "I like the fact that we've got this system pumped full of liquidity, we've got massive policy stimulus not just from the


but from the dollar and fiscal policy," he said, adding that low bond yields also provide weak competition for capital.

One issue that irks the bears, however, is that profit expectations for the second half of the year seem to be far too high. Some analysts worry that the earnings season, which kicks into full gear July 14, could be the catalyst for a pullback, because investors will then have a better sense of how the second half looks, and they don't think it'll be pretty.

"As we head into the final stretch of

the second quarter, there do not appear to be enough signs of improvement now, or in the near future, to cause the capital spending spigot to open enough for corporate America to reach the earnings expectations for

the second half," wrote Chuck Hill, director of research at Thomson First Call.

Second-quarter earnings should end up about 7% to 9% from last year, but the outlook for the third and fourth quarters remains unclear. "The issue now is whether the slashing of estimates

for the second half was pushed back to the

second-quarter reporting season, or whether it will not happen."

Analysts are currently looking for earnings growth of 12.6% in the third quarter and 21.1% in the fourth. "Investors may need to reset their expectations, with continued lackluster growth being the best we can hope for," Hill said.

Still, Tom McManus, an analyst at Banc of America, believes the current rally could last longer than most people think. He notes that earnings came in much better than expected in the first three months of the year and said the strong performance could be repeated in the second, third and fourth quarters, perhaps aided by a slide in the dollar, as well as a pickup in the economy.

"Everyone thinks stocks are ahead of themselves, and so that keeps people on the sidelines. They're all waiting for stocks to get back in line, but unfortunately they never do," he said. "This is a real bull market."