Trading Range Likely

Both bulls and bears have valid points about the market, earnings, and the economy. S&P doesn't see either side prevailing in the near term

By Joseph Lisanti

Recent strength in stocks has given some people the confidence to predict that equities are headed straight up. But we believe the market is likely to bounce within a fairly tight trading range through the end of the year.

Some of the factors we think will cause crosscurrents in the market in the weeks ahead are: seasonal strength vs. technical weakness; good corporate earnings vs. decelerating profit growth; and solid economic growth vs. a potential consumer pullback.

There is no question that the fourth quarter is usually the best period for stocks. In the years after World War II, the S&P 500 has chalked up an average advance of 4.3% in the final three months of the year. But Mark Arbeter, Standard & Poor's chief technical strategist, believes that the easy gains from the October low have already been seen. "Longer-term technical indicators and chart formations remain bearish," he says. Arbeter sees S&P 500 chart resistance and trendline resistance becoming a factor between 1220 and 1245.

Corporate profits remain strong. With 80% of the stocks in the S&P 500 having reported their September-quarter earnings, we estimate a 12.3% gain from the same period a year ago. That would represent the 14th consecutive quarter of year-over-year double-digit percentage growth in S&P 500 operating earnings. But for the full year, we expect growth of 14% in index operating earnings, down from a 24% increase in 2004.

The economy continues to do well. Gross domestic product increased at an annual rate of 3.8% in the third quarter, according to the government's advance estimate. Third-quarter nonfarm productivity surged 4.1%, the best showing since the second quarter of 2004. But consumer confidence continued to fall, and unit vehicle sales dropped sharply in October, both of which we attribute to still-high energy prices.

Until something develops to push stocks meaningfully in one direction or the other, we think a trading range is the likely scenario.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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