We’re deep in the heart of the most dangerous part of the year for the stock market. We face the end of the fiscal year for mutual funds, which usually involves some degree of selling. However, Jack Adamo doesn’t expect that to be bad this year, since the stock market hasn’t had much net movement. Year-to-date, the major indices are only down between 2% and 5%. If the averages mask bigger movements among the individual stocks in them, there may be more selling than expected.
The larger danger comes from earnings season. Any shortfall there could cause a selloff to get worse.
Adamo bets we’ll hear a lot of excuses about the hurricanes affecting earnings. Of course, this will be true of energy companies and companies that do much business or shipping in or through the Gulf region, but we’ll hear others chiming in, too. You may remember a few years ago how companies were blaming their earnings misses on the SARS outbreak in Asia.
The bottom line is that market reaction will be affected by the amount and severity of earnings misses, whether the excuses are believable, and most of all, by the forward guidance companies give. If they guide down earnings expectations for the year ahead, that could be just as damaging as bad earnings now.
Bill Not Due Yet
Despite these negative factors, Adamo’s gut still tells him October won’t be a killer. He’s just not seeing the kind of subtle signs he has seen in past severe corrections. Adamo does think we’re in for a resumption of the secular bear market, but not until early next year. The one thing that gives him pause is the end of Allan Greenspan’s tenure at the Fed. Adamo doesn’t mind that he’s going -- he’ll hold the door for him -- but the market dislikes uncertainty. When traders start to dwell on the future of the Fed, without knowing who is going to be running it, that could throw water on some of the normal year-end enthusiasm. If a successor is named soon, that would be helpful.
Technical indicators also are not pointing toward a debacle at hand. They are definitely showing this cyclical bull is very tired, but they also suggest it should keep going on momentum for a few months longer. Nothing is written in stone, but that’s the most likely scenario. Much of Adamo’s portfolio is not closely correlated to the market anyway, so this presents only a limited risk for him.
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