Here’s what I expect in the coming week

January 23, 2006
Chris Curran

The major indexes finished firmly lower last week,
because of a combination of several negative factors. Several large cap
companies reported numbers which were pretty disappointing. Crude oil was also
trading north of $68 a barrel, which seemed to stem from escalated geopolitical
problems with Iran. Equities actually held their own over the first 3 sessions
of the holiday-shortened week. However, Friday turned out to be one of the more
ugly sessions seen in some time. In fact, the NASDAQ-100 Index (NDX) dropped
roughly 3% alone Friday. The Dow fell close to 2%, which is significant for the
blue chip index. The one pocket of strength all week were Energy shares, with
certain oil drillers/service names breaking out to fresh highs.

While it’s
never positive to see crude oil spike on geopolitical concerns, I do feel that
the main negative catalyst of the week was earnings. The list of companies to
disappoint this earnings season included: General Electric, Citigroup, Intel,
Motorola, Apple, Yahoo, eBay, Xilinx, Alcoa and Phelps Dodge. Take note that 4
of the companies I listed list are Dow components, while many of them are among
the heaviest weighted components of the S&P 500. While 2006 started off with
quite a potent rally, it’s starting to appear that earnings are not living up to
all the bullish optimism. If not for the widespread belief that the Fed may
stop raising interest rates (and supposedly save the day), Ihave little doubt
that the week’s declines would have been much more severe in nature.

Looking
ahead, it’s very likely that equities could be caught in a tug-of-war between
the Fed stopping and the economy/earnings deteriorating. This, in turn, could
put a floor under the current correction. At the same time, until the
uncertainty surrounding the Fed and the economy plays itself out, the upside
could be limited for the equity markets. In other words, consequently, we could
see a range-bound market in the near term.