Relief Rally on Tap After Hurricane Rita

NEW YORK – A relief rally could be in the works next week if Hurricane Rita (search) doesn't cause major damage over the weekend.

Still, earnings warnings and weak economic indicators could dampen investor sentiment.

Hurricane Rita, packing winds of 125 miles per hour, is expected to make landfall late Friday or early Saturday near the Texas-Louisiana border. Forecasters said Rita, which was downgraded to a Category 3 storm, could bring a wave surge of 20 feet and up to 15 inches of rain.

The companies reporting earnings next week include top U.S. drugstore chain Walgreen Co. (WAG), spice maker McCormick & Co. (MCK) and soft drink giant PepsiCo Inc. (PEP). In addition, Home improvement retailer Lowe's Cos. Inc. (LOW) will host an analyst meeting and Chevron Corp. (CVX) is scheduled to provide an interim update.

"Earnings warnings are in the air and obviously, there will be continued warnings on the consumer side. The Street is behind in lowering expectations for this group and there are negative surprises likely ahead in that group," said Tim Ghriskey chief investment officer of Solaris Asset Management in Bedford Hills, New York.

"Clearly energy prices are clouding out other purchases especially with the middle-income consumers. The lower income consumers have been squeezed for a while," he said.

Even before Hurricane Katrina struck, earnings were expected to slow down in the third quarter but after Hurricane Rita, rising energy costs and weak consumer spending threatens to hurt corporate profits even more this quarter.

Still, there could be some relief to energy prices after the Hurricane comes ashore this weekend.

U.S. crude oil futures dived more than $2 on Friday as Hurricane Rita weakened. November crude settled down $2.31 at $64.19 a barrel on the New York Mercantile Exchange (search).

Investors will sift through weekly oil inventory data on Wednesday. Also, September consumer confidence data is expected on Tuesday, August durable goods numbers on Wednesday and second-quarter real gross domestic product data on Thursday.

Weekly initial jobless claim figures on Thursday and August personal income data and University of Michigan's September consumer sentiment index on Friday will also be scrutinized.

"Energy prices may moderate after the storm and that could provide some relief to the stocks and that could be a counterbalancing positive to some of the negative data and earnings warnings that you will see out there," Ghriskey said.