Commentary: All four are reasons to be cautious this summer By Howard Gold NEW YORK (MarketWatch) — I have to admit I was surprised by last week’s huge stock market rally. The Dow Jones Industrial Average soared nearly 650 points in five trading sessions, while the Standard & Poor’s 500 index gained 5.6% and the Nasdaq Composite index rose 6.2%.Yet maybe because I didn’t expect it, I just don’t trust it. So much movement on so little volume — and not much news to drive it, except the latest tentative settlement on Greece. And until Tuesday, oil and gold, two of the primary movers in the “risk on” trade that drove the market from its lows of last summer, either barely participated or fell. That’s one reason I suspect — but can’t prove — that the stock rally was dominated by pros looking to push up prices and exit their positions ahead of earnings season. I’m still pretty cautious about the market this summer. Unless we see big improvement in the economy, which I don’t anticipate, the fundamental underpinnings are pretty weak. And there’s little prospect of the massive government and central bank interventions that helped drive stocks higher last year. I can see four barriers to the market’s progress in coming months — earnings, the economy, the European debt drama and the debt ceiling debate in the U.S. The market must clear these hurdles before it can move beyond its recent highs. Read Howard’ Golds “Three Simple Ways to Protect Your Profits” on MoneyShow.com. 1. Earnings Earnings season is almost upon us, and we’ve seen six consecutive quarters of double-digit earnings growth. That’s likely to continue this time around as well (analysts project 12% increases over last year’s second quarter), although just beating estimates is having diminishing returns. Why? Because it’s expected and companies have been, ahem, managing earnings, so they usually come in just a hair over consensus, enough to give stocks a nice pop. Uncanny! Even the bullish James Paulsen, chief investment strategist at Wells Capital Management, isn’t looking for much from earnings season. In a note to clients, he said this season “could disappoint” because it reflected a soft patch in the economy caused by disruptions from Japan and bad weather. He thinks margins have probably peaked, which he calls normal at this point in the cycle. “So, [investors] may look toward company commentary/expectations about [the second] half as the more important information,“ he concluded. Indeed, executives’ outlooks on the rest of the year will get the closest scrutiny. “Second-quarter earnings are going to be fine, but the guidance is going to be awful,” Burt White, managing director and chief investment officer at LPL Financial, told the Financial Times, which added, “lower guidance from companies might cause analysts to reassess their record $100 per share full-year earnings forecast for the S&P 500.” 2. The U.S. economy That brings us to hurdle No. 2, the economy, which has stumbled badly. U.S. gross domestic product grew at an annual rate of only 1.8% in the first quarter. May’s survey of manufacturing activity had its biggest one-month drop since 1984. We may indeed be going through a soft patch, with growth slated to pick up in the second half, but this recovery remains by many measures the weakest since World War II.

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