Can Earnings Season Breathe New Life into the Rally?

• Ian Wyatt
• On 2:15 pm EDT, Thursday October 1, 2009

Third Quarter earnings can't get here quickly enough for me. We need some new information to support the Cash for Clunker Stock rally. And I think earnings season is our best chance to see new life breathed into stock valuations.

It's no surprise that investors are growing tired of the flip-flopping economic data. Unemployment claims come in better than expected one week, and then worse than expected the next. Manufacturing data looked promising last month, this month, not so much. Housing data is doing the same non-rhythmic dance.

Basically, new economic data is showing the brutal downward-sloping trendline of previous economic data has been broken. But we haven't established a new uptrend for economic data yet. And if you remember how the stock market gyrated during the "jobless recovery" of 2004, you know it can take a while for data like unemployment to get on a positive track.

*****You might be wondering why I would look to earnings to help reinforce the idea that the US economy is improving and buying stocks is a good idea. After all, many analysts are skeptical that Second Quarter earnings growth, which was largely based on cost-cutting measures, will continue into the Third Quarter on the back of rising revenues. 

That revenues won't rise is virtually a consensus. And anytime there's a consensus about anything in the financial markets, you're wise to investigate why everyone is wrong. Now, that's not to say that investing against the crowd is always the right move. It's not. But knowing why the crowd might be wrong is always a good idea. And I suspect that we might see an upside surprise for both revenues and earnings when earnings season kicks off in a week.

*****For starters, we've seen consumer spending increase the last couple of months. Just today, the Commerce Department reported that consumer spending jumped 1.2% in August, after a 0.2% jump in July. Both numbers were higher than expected.

Incomes grew 0.2%. Because spending outpaced incomes, it's assumed that the savings rate fell.

We've seen some unexpected upgrades based on spending, too. Department store Macy's (NYSE:M - News) received an upgrade recently, and Alcoa (NYSE:AA - News) got an upgrade today. And in a recent poll, 51% of 107 Chief Executive Officers (CEOs) in Corporate America say they see sales rising going forward.

Of course, upgrades ahead of earnings are sometimes suspect. It's a great way to inflate the price so you can dump stock ahead of an important event, like an earnings announcement. I can't say I'd recommend Alcoa as an investment, but since it's the official starter for earnings season, I'm always interested in its results. Alcoa reports on October 7.

*****The US dollar got creamed yesterday. Of course, that meant a nice rally for oil prices. But it also meant a nice move toward $1,000 an ounce for gold. As you know, I've been watching the US Dollar Index find support at 76 and rally…

I expect the next move to be a drop below 76, to 74, or even 72. Such a move will send gold prices above $1,000. And that's why I just recommended a gold stock to my Top Stock Insights readers. You can get the details on this gold stock, plus 2 others, in the Special Report Gold Rush 2010: 3 Gold Stocks for Gold Over $1,000. You can get your copy HERE.

Ian Wyatt is Chief Investment Strategist of SmallCapInvestor.com and the author of "The Small-Cap Investor." You can learn more about his book at www.SmallCapBook.com.

Buzz up!