Image: Lodewick
Trader Kevin Lodewick, right, observes a moment of silence on the floor of the New York Stock Exchange Wednesday at 9:59 a.m., the time the first of the World Trade Center buildings collapsed one year ago.
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msnbc.com

Wall Street faces the busiest period of third-quarter earnings season this week, with nine members of the Dow Jones industrial average due to issue results. If the news continues to be rosy, some are asking if the Dow can break through the 10,000 mark. Market watchers are doubtful, but say it could happen by year-end.

An index that measures the performance of 30 companies considered leaders in their respective industries, the Dow isn’t Wall Street watchers’ preferred gauge of the overall stock market. For that, most follow the broader Standard & Poor’s 500-stock index.

But the Dow is the U.S. stock market’s most familiar index and if it were to break through the 10,000 level next week for the first time since May 2002 it would have psychological significance for Wall Street most market watchers say, although it wouldn’t necessarily be important from a technical standpoint.

“Dow 10,000 isn’t a key resistance level,” said Peter Cardillo, chief strategist at Global Partners Securities, referring to a point at which a stock or market stops rising because sellers start to outnumber buyers. “It’s more of a psychological overhang for the market.”

Evoking memories of 1999
Dow 10,000 is likely to revive memories of March 19, 1999 — the first time it hit that milestone on an intra-day basis. The blue-chip index first closed above 10,000 on March 29 that year, producing headlines worldwide. The index fell back below 10,000 in 2001 and moved above it again in May 2002, albeit temporarily.

A wave of selling, rather than a wave of euphoria, is likely to greet a new move back above 10,000 according to Frederic Dickson, director of retail research at brokerage D.A. Davidson in Lake Oswego, Ore., as investors may use the milestone as an excuse to take profits.

“Some investors are eyeing visible targets to take some profits, and major market benchmarks will be target points for program selling,” said Dickson, referring to computer-driven selling of groups of stocks by big institutional investors. “They’re looking at 10,000 for systematic sells, since it’s an easy-to-fix target.”

Crossing the 10,000 target could give traders an emotional boost, but despite a steady stream of good third-quarter earnings news in recent weeks in the near term the stock market is likely to see a pull-back of around 5 percent, Cardillo noted.

“The good earnings news is already priced into the market and that’s why we’re starting to see some selling emerge,” Cardillo said.

Still, any near-term correction in stock prices is likely to set the stage for the market to see a strong year-end rally, especially if we see a continued steam of good economic numbers, Cardillo added. He predicts the Dow will be at a level between 10,400 and 10,600 by the start of 2004.

“We’ll probably see a bit of selling through earnings and then we’ll move up toward the end of the year,” said Cardillo. “After that it depends on the economy.”

Major Market Indices

Traders focus on earnings deluge
Traders may keep an eye on the Dow’s level this week, but with third-quarter earnings season hitting its stride this week most of their attention is likely to be fixed on a deluge of corporate profit reports.

This week 172 companies in the Standard & Poor’s 500-stock index, a broad market barometer, report results. Earnings scorecards are also expected from blue-chip Dow 30 member firms like AT&T, Citigroup, J.P. Morgan Chase, 3M, Merck and Coca-Cola.

All told, about 65 percent of the companies in the benchmark S&P 500 index will have reported third-quarter results by the end of Friday.

Corporations are expected to continue to beat expectations. A consensus of analysts polled by earnings research firm Thomson First Call sees earnings for companies in the S&P 500 index rising 18.1 percent from the third quarter one year ago, up from 16.2 percent year-over-year growth predicted one week ago.

“We have moved up significantly from a week ago,” said Joseph Cooper, a research analyst at Thomson, adding that an unusual number of companies are beating profit expectations.

“Normally, by this time in earnings season 20 percent of companies have said they will miss expectations, but of the companies that have reported so far only 9 percent have missed expectations — that’s pretty significant,” said Cooper.

Cooper doesn’t think the good earnings news will automatically push the Dow above 10,000.

“If more big companies come out and beat earnings expectations and guide higher it’s possible, but the market has had an incredible run-up and to see it go higher could be a stretch because of where valuations are right now,” Cooper said.

Sustained economic strength seen
Economic data this week will be thin on the ground, with only a handful of reports offering a clearer picture of the nation’s economy. Still, Scott Anderson, a senior economist at Wells Fargo, sees the economy’s strengthening trend continuing.

“The economic recovery looks more robust than most market participants had thought,” Anderson said. “We’re seeing a lot of strength in the consumer spending and manufacturing areas and we have raised our outlook for third-quarter GDP to 7 percent.”

Monday’s index of leading economic indicators, which aims to predict economic activity in the coming months and is issued by the Conference Board, a private research group, should show a 0.2 percent gain, Anderson said, indicating continued economic expansion.

The other big economic report this week will be on weekly jobless claims, said Anderson. “We are looking for continued improvement there, indicating some expansion in employment growth,” he said.

Investors have shoveled cash into stocks since the spring, betting on an economic recovery in the second half of 2003. The technology-laced Nasdaq Composite has leaped 43.2 percent so far this year, while the S&P 500 index has climbed 18.1 percent and the Dow is up 16.5 percent.

Stocks struggled last week as a few disappointing business forecasts from corporate America prompted investors to cash in on the market’s recent rally from multi-year lows seen in the spring. Mid-week, the Dow rose to within striking distance of 10,000 and Nasdaq stocks pushed to their highest levels in 20 months.

The major market indices closed the week mixed. The Dow rose 0.5 percent, the Nasdaq Composite lost 0.2 percent and the S&P 500 index added 0.1 percent.

Reuters contributed to this story.

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