Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports this week include Empire Manufacturing, Housing Market Index, Consumer Price Index, Housing Starts, Building Permits, Industrial Production, Capacity Utilization, Initial Jobless Claims, Leading Indicators and Philadelphia Fed. Consumer Price Index, Housing Starts, Leading Indicators and Philly Fed. all have market-moving potential.

Lowe's(LOW), Kmart Holding(KMRT), BJ's Wholesale(BJ), Deere & Co.(DE), Home Depot(HD), J.C. Penney(JCP), Staples(SPLS), Applied Materials(AMAT), Brocade(BRCD), Intuit(INTU), Medtronic(MDT), Nortel(NT), Barnes & Noble(BKS), Limited Brands(LTD), The Gap(GPS), Nordstrom(JWN) and Novell(NOVL) are some of the more important companies that release quarterly earnings this week. There are also several other events that have market-moving potential. The CS First Boston Small Cap IT Services Conference and SEMI Book-to-Bill Report could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week modestly higher, led by an oversold bounce in technology shares. However, equities will likely weaken the following week on terrorism fears ahead of the Republican Convention. I expect measures of investor anxiety to spike higher again during this period. I continue to believe stocks will make an intermediate-term bottom during the next 6 weeks, setting the stage for an exceptional fourth quarter. Short Funds with substantial gains for the year will likely begin to cover to protect profits. The Hennessee Hedge Fund US Short-biased Index rose 10.2% in July, its best performance since the terror-induced market sell-off of September 2001. Moreover, the 4 week average of Specialist Short Sales to Total Short Sales is at the lowest levels since at least the 1960's. I expect fundamental demand to snap back in the fourth quarter as political uncertainty lifts, terrorism fears subside, energy prices fall and businesses increase spending on capital equipment to take advantage of tax incentives before they expire at year-end. Many companies should beat their recently lowered earnings forecasts.