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Will Q2 Earnings Reports and Congressional Action on the Debt Ceiling in July Turn the Market?

Yesterday’s advance confirms my assumption Friday and Monday that Institutional money managers are finding stocks attractive after an 8% decline since May 2. Then too, some buying can be

Yesterday’s advance confirms my assumption Friday and Monday that Institutional money managers are finding stocks attractive after an 8% decline since May 2. Then too, some buying can be attributed to portfolio adjustments before the end of Q2, as well as buying in anticipation of Q2 earnings reports due in July and August.

Brooksie’s Daily Stock Market blog
-an edge before the market opens

Tuesday, June 28, 2011 9:23 am EDT

DJIA: 12,043.56
S&P500: 1280.10
Nasdaq Comp.: 2688.28
Russell 2000: 805.14

Put yourself in the money managers’ shoes (without the big bucks) and look at it this way. An 8% discount for current negatives is reasonable, especially in light of the fact these negatives can mostly vanish over night.

As a money manager, you have clients’ cash to invest. In a market like this, that is best committed over time, not all at once.

Greece’s situation is dire enough to attract a solution that will be painful for it and European banks, but at least a domino effect will be averted.

Odds favor Congress will OK a debt ceiling increase, averting a U.S. default on certain obligations. The consequences of the latter, are unthinkable, politically disastrous.

That leaves a slowing economy – slowing, but not nose diving. At the first sign of stability (probably before) the institutions will ramp up their purchase programs.

These managers, must do some buying as prices tumble. If they wait for good news, they will have to pay-up for targeted stocks.

Does this mean we have seen the lows for this decline ? NO !

Uncertainties can mount further. While it stands to reason, a default by Greece will be averted, it is not guaranteed.

As the assumed August 2 deadline for Congressional approval of a debt ceiling increase approaches, fears of a U.S. default on certain obligations will mount as the issue begins to dominate the news headlines.

Evidence of a renewal in the economic expansion may come in Q4 instead of Q3 causing money managers to space out commitments, enabling stock prices to slip further.

It is likely, the news headlines in coming weeks will be uglier than the facts underlying the stories. This could trigger yet another decline in stock prices.

Under worst case circumstances, I see the potential for a drop in the DJIA to the 10,700-10,830 area (S&P 500: 1150) with one rebound starting July 29 or August 1 prior to a last minute accord on deficit reduction measures and consequently the approval of an increase in the debt ceiling, averting a U.S. default.

That would be followed by a test of the lows. A successful test of that low would require more assurance that a renewal in the economic expansion is imminent.

What could change this scenario ?

If an accord is reached in Congress well ahead of the August 2 deadline , or if BIG money assumes it will be, and steps in ahead of any announcement. That, coupled with better –than-expected Q2 earnings reports, would solidify the June lows as a base for the next move up.

George Brooks
[email protected]
The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk

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