What a Week: Market 'Earned' Positive Finish

Strong earnings news is the serum for a negative reaction to Greenspan, an eerie plane crash and a terror threat to banks.

Author:: Robert Mann
Publish date:: Apr 19, 2002 5:12 PM EDT

For some time now, many market participants and observers have been expecting a sharp movement for stocks, although opinions vary greatly in which direction. Recently, I discussed some

trading strategies for an onset of higher volatility.

Despite some sharp day-to-day and intraday swings, this week did little to resolve the debate, as movements for the major averages were relatively muted.

For the week, the

Dow Jones Industrial Average

rose 0.8%, the

S&P 500

gained 1.3% and the

Nasdaq Composite

climbed 2.3%, breaking a string of four weekly declines.

The bulk of the gains were generated during Tuesday's big rally, triggered by a host of positive earnings news from companies such as

Texas Instruments

(TXN) - Get Report

General Motors

(GM) - Get Report

Johnson & Johnson

(JNJ) - Get Report

and

Novellus Systems

(NVLS)

Earnings were clearly the dominant focus for the market this week, although

Federal Reserve

Chairman Alan Greenspan's

congressional testimony on Wednesday received traders' rapt attention.

Bears said the market's inability to capitalize on Greenspan's friendly comments -- he dramatically reduced expectations for near-term tightening -- was a

harbinger of difficult times. Short-lived reversals after news of a plane crashing into a building in Milan, Italy, on Thursday and the FBI's warning Friday about possible attacks on U.S. banks were further evidence of the market's tenuous state, said the skeptics.

But optimists were summarily cheered by the weekly advance for major averages, and believe it marks the start of a long-awaited rally.

"We think

the market's at a bottom," John Brooks, a director at Notley Information Services in Atlanta, said Friday. "They've thrown a lot at this tape -- Middle East

tensions,

General Electric

(GE) - Get Report

and

IBM

(IBM) - Get Report

got blown up -- and we're still holding together decently."

Acknowledging that "GE going down hurt more people than the advance/decline going up," Brooks suggested the latter is a sign of money "quietly going into" the market. "The tape feels as if we're going down, but I don't think you are," he continued, reiterating a rally call made

here in late March.

Among the names Notley recommends are financials

Morgan Stanley

(MWD)

American Express

(AXP) - Get Report

Citigroup

and

Wells Fargo

(WFC) - Get Report

; consumer plays

Disney

(DIS) - Get Report

Coca-Cola

(KO) - Get Report

and

Starbucks

(SBUX) - Get Report

Notley also recommends a host of tech plays, including

Adobe Resources

(ADBE) - Get Report

Broadcom

(BRCM)

Mercury Interactive

(MERQ)

Siebel Systems

(SEBL)

i2 Technologies

(ITWO)

and

Intuit

(INTU) - Get Report

"At the end of the day, you go through chart patterns and they're building bases," said Brooks, a co-founder of the Market Technicians Association. "It's the exact opposite of last March, when the Dow was going up and the market was breaking down."

Notably, Brooks believes the market is in a secular bear market -- "which means you're not going to get to Nasdaq 5000 or even 3000" -- but expects a forthcoming rally will last through the summer. The Comp may rally to as high as 2500 -- a "very healthy bull market run" -- and the Dow may hit a new high, he forecast: "The point is we want to be participating in the upcoming rally."

Brooks suggested a few days of solid gains will bring forth skeptics who'll claim stocks are overvalued, helping to fuel the proverbial wall of worry. I expect the opposite -- pundits will be quick to back the rally and encourage investors to buy into it. But that remains to be seen and is contingent on the onset of a sustained rally.

On Friday, stock proxies struggled despite the

positive spin Wall Street attempted on

Microsoft's

(MSFT) - Get Report

earnings. The software giant rallied 1.5% Friday, but the Dow rose just 0.5%, while the S&P 500 gained just 0.1% and the Comp fell 0.3%.

Moderation Man Returns

Despite varying calls for big rallies or huge declines, a continuation of the recent pattern of mainly sideways, trendless action is the ongoing expectation of Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Atlanta.

"I'm still very much

the moderate," Belski said Friday. "It is a transitionary market and we are making a bottom,

but it's going to take several quarters, not two or three to make a bottom."

The market is transitioning from a period of negative earnings to positive, Belski said, but is still not at a growth phase.

Much of the improving earnings reported this week are due to "prudent management," i.e., better cost controls and layoffs, rather than an improving operating environment, he said. "We don't see the potential trough

for earnings for a few more quarters," particularly for tech -- as indicated in the forward guidance of many companies this week, including

Nokia

(NOK) - Get Report

SBC Communications

(SBC)

and

Advanced Micro Devices

(AMD) - Get Report

In a "cyclical market you want to buy things when P/Es are high and earnings are low," the strategist continued. The challenge is correctly assessing which companies are at which point in their particular cycle.

That's a fancy way of saying "it's a stock picker's market" and one in which major averages will struggle to post big gains, but won't suffer big losses either.

Belski didn't argue with that interpretation of his comments, which pretty well summed up the week just past.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.