BARRON'S-The Trader | SATURDAY, OCTOBER 2, 2010 September Sang, but October May Sink By LESLIE P. NORTON AND VITO J. RACANELLI |
"The month just ended marked a victory for bulls, but stocks look toppy, and October may be gloomier. Also, don't get tripped up by MakeMyTrip."
"Most people were shocked that the market could be this strong over a month when seemingly the economic environment didn't corroborate it," says John Roque, managing director at WJB Capital. "It could be that people feel this is the last time they can have decent performance."
"In fact, short-covering bolstered prices over the month. Ned Davis Research notes that short interest on the NYSE and Nasdaq recently climbed to 12-month highs, "encouraged by all the talk about a double-dip recession."
Yet Friday's gains couldn't mask that stocks were looking toppy. So when it was all over but the shouting, the Dow ended the week 30.58 points, or 0.28%, lower, at 10,829.68. The Nasdaq fell 10.47 or 0.44% this week, to 2370.75, its first down week in five. And the S&P 500 fell 2.43 points, or 0.21%. to 1146.24. The Russell 2000, meanwhile, rose 8.28 points or 1.23% to 679.29.
Could the market advance without a few thorns among the roses? Here are a couple of big concerns: Protectionist rhetoric is likely to escalate before the election amid wrath about China's cheap currency. Even if China lets its currency drift higher, it's likely to squeeze technology plays, industrials and large retailers with significant supply chains in China, says Joseph Quinlan, chief market strategist at U.S. Trust.
This month, 80% of the companies in the S&P 500 will report third-quarter earnings. Don't be surprised if they guide lower (so they can surprise you on the upside later). Credit Suisse notes that analysts are starting to reduce their earnings forecasts, which "leads us to expect fewer positive surprises" in the September quarter than in June.
October is traditionally a so-so month for stocks. And if the Fed doesn't deliver QE II in November, as is expected, and the economy keeps weakening, then expect the market to sink."