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Will the rally roll through December?

Prospects for a  fourth-quarter rally appear to depend on conflicting information:  The  jobs creation report was  disappointing, with only 112,000 new jobs in November.  But oil prices fell last week — a strong leading indicator for the economy.
/ Source: The Associated Press

So far, Wall Street’s hoped-for fourth-quarter rally has met investors’ expectations. But there’s been enough bad news lately to make you wonder if the buying will sputter.

First, the economy doesn’t look as rosy as it did a month ago. Friday’s jobs creation report was extremely disappointing, with only 112,000 new jobs in November, far less than the 200,000 Wall Street expected. And holiday shopping started slowly, dimming the prospects for the rest of the season.

Moreover, analysts note that the market is overpriced, with the Standard & Poor’s 500 large-cap index and the Russell 2000 small-cap index both at multi-year highs. And earnings growth for most companies is expected to slow going into 2005.

But before you start selling, take heart: The market still has a few things going for it.

Crude oil prices dip
For one, oil prices plummeted last week, which is a strong leading indicator for the rest of the economy. High energy prices have kept businesses from expanding and consumers from spending freely.

While crude oil futures are nowhere near the $25 to $30 per barrel mark that they’ve historically enjoyed this time of year, a sustained move lower from the current $42-per-barrel level will spur consumer buying, which in turn could increase profits and prompt companies to add jobs.

Furthermore, there’s still a fair amount of exuberance among investors, and the flow of money going into stocks remains strong, so even if there’s a selloff, plenty of buyers can be expected to come back into the market.

So for now, even if December’s rally looks shaky, there’s no reason to write it off just yet. Last week was a good example of investor enthusiasm — helped by oil prices — overcoming bad economic news. All three major indexes rose for the week despite a poor Thanksgiving weekend retail showing and the lower-than-expected jobs report.

For the week, the Dow gained 0.67 percent, the S&P 500 was up 0.72 percent and the Nadsaq rose 2.19 percent.

Two key indexes this week
The two most important pieces of economic news due in the week ahead will come out Friday, when the University of Michigan issues its preliminary consumer sentiment index for December, and the Labor Department issues its Producer Price Index reading for November.

The Michigan index is considered one of the best tools for tracking consumers’ attitudes, and with the holiday season under way, investors will be eager to see if consumers feel enough cheer to head to the malls. The index is expected to come in at 95.3, up from a 92.8 reading in November.

The PPI, which measures the costs of goods and services at the wholesale level, is expected to post a modest rise of 0.2 percent, far from the 1.7 percent hike in October. However, that figure included a steep rise in energy prices, which Wall Street hopes has leveled off for now.

Earnings from National Semi, Costco, DreamWorks
Only a handful of notable companies are scheduled to release earnings in the week ahead, and of those, National Semiconductor Corp. will likely be the most closely watched, following Intel Corp.’s strong mid-quarter update on Thursday.

The semiconductor maker, slated to report on Thursday, is expected to earn 15 cents per share for the quarter, slightly less than the 18 cents per share profit from a year ago. The stock rose 15 cents to close at $16.20 on Friday, 35 percent above its 2004 low of $12 on Sept. 8, but still off 33.25 percent from its April 12 high of $24.27.

Should National Semi post profits above expectations, that would lend credence to the notion that the technology industry was poised for better times. Otherwise, Intel’s forecast could be seen as an isolated occurrence, which could lead to a tech selloff.

Other companies reporting in the week ahead include bulk retailer Costco Wholesale Corp., expected to earn 40 cents per share when it reports on Thursday; and newcomer DreamWorks Animation SKG Inc., which went public in October and is expected to earn 17 cents per share in its first quarterly report.