Makings of a Solid Rally

Well, the third quarter is behind us and it’s almost earnings season once again. I can’t wait to get a look at the numbers.

Earnings season is always the best time to be researching new investment opportunities. You get the latest numbers from a company, you get its best forecast for the future, and the stock market renews its sentiment (for better or for worse).

Right now, the stock market’s been doing quite well. The price of oil and gasoline has receded, the interest rate outlook is flat, retail spending is good, and the economy is slowing at only a measured pace. In my mind, this is the makings of a solid rally in stock prices.

So, when corporate earnings come out, the stock market will focus its attention on the numbers, and this will provide the catalyst that this market’s has been waiting for. I’m seeing many companies report slower business conditions, but most are running lean operations so I expect net incomes to be quite solid.

It bugs me that OPEC is talking about cutting 1 million barrels of oil per day of global production. At $60 a barrel, the price of oil is still too expensive. At $40 a barrel, the economy could be reenergized without having to worry about inflation.

The Federal Reserve has done a good job taming this economy and prices, but we risk going into a recession in 2007 if the central bank doesn’t reduce rates somewhat next year. A lower oil price would provide the breathing room that the Fed needs to do this.

If we do go into recession next year, you can blame OPEC for unreasonably high oil prices. Regardless, the good news is that I think we can get a sustained stock market rally as soon as we get a look at third quarter corporate earnings.