What’s Next For The Market?

A slew of major earnings reports this week could be just what the market needs to decide which way it will break out of its two-month trading range.

With Intel reporting after the close tomorrow, IBM after the close on Wednesday, and Microsoft , eBay and Sun Microsystems after the close on Thursday, it could be a decisive week for the market. Throw in a couple of major cycle turn dates, and it could be quite a recipe for volatility.

Of those earnings reports, IBM’s is probably the most important. Investors and analysts expect IBM to meet expectations with 8.7% earnings growth, to $1.15 a share. Hardly exciting numbers for a company with a PE of 24, but certainly much better than a lot of techs will do this quarter. IBM’s earnings and outlook probably have the greatest potential to move the market this week, although Intel’s numbers may take on added importance after AMD’s disappointing results last week. Intel’s earnings are expected to fall 70%, to 11 cents a share.

Microsoft’s numbers are already known, which sets up a possible sell-on-the-news scenario (and another chance for investors to rethink that $3.9 billion accounting charge). The $73 level remains strong resistance, and all the company’s purported good news as of late has failed to break that resistance.

eBay’s numbers should be terrific; the question is how much the company will beat estimates by, and how much investors are willing to pay for those earnings. Analysts expect the company to report earnings of 9 cents a share, up 82% from a year ago, but it’s going to take more than that to justify a forward PE of 163. However, the company’s ability to deliver booming growth in this environment has been impressive indeed. Oddly, an eventual economic rebound might be bad news for EBAY shareholders, because other investment candidates would emerge. At the moment, there aren’t many, if any, places to find eBay’s level of growth.

Sun Micro, on the other hand, should probably be trading at about half its current valuation, with earnings expected to fall 85% to 3 cents a share. With flat growth projected for the next year, the company does not merit a PE of 37.

Throw in a likely default on $128 billion of bonds by Argentina, and two very big cycle turn dates on Tuesday and Wednesday (a 55-day turn off the May 22 top and a strong Bradley turn equal in strength to the April 4 bottom), and this week has pretty high odds of producing a clear signal for traders.

And a few items from last week worth noting:

The big Microsoft-inspired rally on Thursday had a little help: The Federal Reserve pumped $9 billion into the system Thursday morning, either in an attempt to use the Microsoft news to cement a bottom in the market, or out of concern over events in Argentina. Either way, Thursday’s rally was not strictly about Microsoft. Some observers believe the Fed operation set a record. A risky strategy for several reasons, not the least of which is that it puts the Fed’s credibility on the line. Let’s hope it works.

An offhand observation about consumer spending: Retail sales have very closely tracked the performance of the stock market this year, with huge gains in sales accompanying big market rallies in January and April, followed by anemic sales growth (in the case of March, a decline) in flat to down months for the market. Never before has U.S. personal wealth been so closely tied to the stock market, but the strength of the correlation between retail sales and the stock market this year is surprising. There are likely other factors at work, but the correlation is worth noting. April retail sales may have been just strong enough to keep second-quarter GDP positive.

And finally, the CRB showed some signs of a possible bottom last week (see chart below). A rise in commodity prices could be bullish for the economy because it could mean that the Fed’s reflation efforts are taking hold. A move above 215 would likely confirm a bottom for the CRB.

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