A September Bear Looks to October

by David Callaway

Friday, September 24, 2010

Earnings warnings in the tech and banking industries. A two-day crack in the dollar. Gold nearing $1,300 an ounce. And the Obama Administration imploding faster than the Chicago Cubs in April.

I admit it. I was one of the bears on September, telling everybody that the traditional bad month for stocks was shaping up to be a doozy this year. And through three weeks, the market has proved me wrong.

Of course, it's the second half of September that earns the month its poor reputation, so we've still got a few days left. But you can't argue with a 7% gain in stocks in such a short time. It's been a good run. More from MarketWatch.com:

Which makes me all the more worried about the next few weeks as earnings warning season hits. The S&P 500 Index (NYSE: ^GSPC - News) is stuck at the 1,130 level that many technical analysts say it has to clear before we can have another meaningful move higher.

Even though the European debt situation appears to have faded, for now, it's hard to see stocks extending their gains all the way through the election and then beyond to the end of the year, without some sort of pullback. If one is to come, earnings warning season might be the time.

Step forward to October, a month of notorious market meltdowns, as well as a month known for marking the bottom of big stock declines. Now that the Fed is out of the way for another six weeks or so, it's all about earnings for U.S. markets.

Adobe Systems Inc.'s (Nasdaq: ADBE - News) weaker-than-expected outlook really wasn't that weak, but investors wasted no time reacting on Wednesday, pummeling the shares for a 20% loss to a new 52-week low at one point in trading.

A hair-trigger reaction like that shows a nervous market, with investors poised to move quickly to protect the gift given to them by the markets in the past few weeks.

Likewise the sudden move by the euro against the dollar, springing from $1.30 to above $1.34 in just two days of trading. Yes, sighs of relief from Irish and Greek debt investors after successful bond auctions helped, but that was still an extraordinary move.

Meanwhile, Deutsche Bank's (NYSE: DB - News) warning about third-quarter results from its corporate banking and securities business confirmed what we already knew about what a lousy summer it was on Wall Street. Big banks are already shedding jobs as a dull market with no volume hits their results.

Against this weak backdrop are the huge gains in gold and silver, which continue to defy gravity on the weak dollar and in anticipation of a spike in inflation that the Fed just can't see right now. Moves by the Obama Administration to conduct the traditional midterm housecleaning before the election can't help the dollar, so precious metals bulls are relishing the opportunity to push even higher in the next several days.

The key here is the trading volumes. They've started to pick up in the past few days. If we're going to see a jump in volatility it will likely come soon, before the traditional pre-election rally takes hold and fund managers begin prepping their portfolios for a fourth-quarter run.

If stocks do lurch lower, however, bulls will see that as a buying opportunity ahead of expectations for a better economic recovery after the election and early next year. And as noted before, there is a ton of cash on the sidelines looking for an appropriate entry point.

So while the next few weeks of earnings warnings could be a nightmare for some specific shareholders, particularly in tech and banking, any pickup in trading activity can only be a plus for investors looking past the quarterly earnings horror show.