Market offers new puzzle for investors

NEW YORK -- Third-quarter earnings season has created something of a paradox: an increase in profit warnings, yet decent rallies in the stock market.

If you factor in the vast political and economic uncertainty following the Sept. 11 terror attacks and the spread of anthrax, it's even harder to imagine why anyone would want to buy on Wall Street.

"They want to buy stocks. They want to see the glass half full," said Woody Dorsey, president of Market Semiotics, a financial forecasting firm in Castleton, Vt.

Market analysts have several theories about this curious combination. They say investors probably don't want to miss out on the next big rally, or the start of a new bull market. Investors might be betting that the market can't fall much harder than it did in the first week of trading following the attacks, when they pulled $1.2 trillion from Wall Street.

"The market is perhaps looking at the worst being over," said Gary Kaltbaum, market technician for Investors' Edge Partners.

Others say investors have become used to news about anthrax cases, terrorism and earnings disappointments, and for now are willing to place bets on business improving next year.

"The philosophy that the economy is going to pick up in the first or second quarter is overshadowing any fears of terrorist attacks," said Richard A. Dickson, an analyst at Hilliard Lyons in Louisville, Ky.

And, as for the daily reports of anthrax, "This is sort of old news, although it is terrible that it is happening," Dickson said.

There's no question that market has weathered the negative forces, even recovering all $1.2 trillion that it lost in the first week of trading after the attacks.

The strength is apparent in the major stock indexes, as well. The Dow Jones industrials, which had triple-digit rallies on Monday and Thursday, has recouped all but 60 of the 1,369 points lost that first week. The Nasdaq composite index is 73 points above where it stood Sept. 10; the Standard & Poor's 500 index, up about 12.

Whatever the reason for the recent rally, Dorsey said, "It won't last." The best the market can expect is the pre-attack levels they've achieved, because companies still can't say when business will get any better.

And, unfortunately for Wall Street, corporate profit warnings have been on the rise. So far during this earnings reporting season, 246 companies reduced their outlooks for the fourth quarter, according to Thomson Financial/First Call. That's the greatest number of warnings issued for any quarter this year.

Analysts who rate stocks have also grown more pessimistic. They estimate fourth-quarter earnings for the S&P 500 will be down 15.2 percent, much worse than the 2.6 percent drop predicted before the attacks, Hill said. As for the first quarter, analysts expect a 4.1 percent decline in profits, rather than a 3.5 percent gain.

"There is no sign of deceleration in warnings, and that is an ominous thing. ... There is nothing to cheer about here," said Chuck Hill, director of research for Thomson Financial/First Call.

Because investors are said to trade based on the future, the rallies seem to make no sense. However, there were signs that the mood on Wall Street wasn't overly enthusiastic. Trading volume was light to moderate, indicating some players weren't participating in the rallies. The difference in the number of rising stock prices over declining ones was slim.

Along with ongoing concerns economic and political concerns, analysts don't expect the rallies to continue for long.

"This is a high-wire act. Any announcement of anthrax or earnings disappointment or terrorism scare could provide a selling catalyst," said Bryan Piskorowski, market commentator for Prudential Securities.

The best Wall Street can expect is to rally a bit more in the near-term before selling off on persistent fears about the weak economy, dismal earnings and additional terror attacks, analysts said.

"Enjoy it. The market deserves to have a good rally here," Dorsey said. "We had a very negative market, and a terrible event."

For the week, the Dow climbed 341.06, or 3.7 percent, after advancing 82.27 to 9,545.17 Friday.

The Nasdaq rose 97.65, or 5.8 percent, for the week after declining 6.51 to 1,768.96 Friday. The S&P 500 ended the week up 31.13, or 2.9 percent, after rising 4.52 to 1,104.61 Friday.