To say that the first half of 2010 set the year with an inauspicious start would be an understatement. The broad based S&P 500 index – which tracks the moves of the biggest 500 stocks on Wall Street – is already down nearly 4% since January… And nearly 12% since April.

But stocks could be setting themselves up for a new rally – if a few stars can align.

The old adage goes that everything is priced into the market. From the moment news is disseminated to the public, it’s analyzed and dissected to form the basis for investment decisions.

It’s no shock then that Europe’s debt problems have hurt stocks here at home. The declining value of the Euro means that one of our biggest trading partners has less buying power – and as a result, U.S. companies who sell products across the pond are seeing the valuations of their Euro-denominated operations fall hard.

But real economic news isn’t the only reason stocks have lagged this year. Estimates – also known as best guesses – play a big role on Wall Street. And like news, they’re used by retail investors and institutions alike to make investment choices.

That means that when analysts expect a company to report earnings of $1 per share, those earnings are priced into the stock before the company announces its results.

Wall Street estimates, though, aren’t always spot on; that’s where earnings season volatility comes in. When a company delivers numbers above estimates, the stock jumps – after all, the lower numbers had already been priced into it. When they underperform estimates, the opposite happens.

So it’s no surprise that in 2009, when the bears were out in full force and analysts were sticking to conservative estimates, companies continually outperformed the Wall Street’s best guesses and stocks rallied.

In 2010, though, analysts have adjusted their models. They realized that their numbers in 2009 were too conservative – and they’ve succeeded in completely overshooting earnings on scores of key companies in the past quarter.

Stocks have tumbled as a result.

But a technically oversold market and increasingly bearish stance from analysts look to turn that around this quarter. With stocks trading at levels not seen since last October, investors are realizing that a bullish bounce is eminent. More often than not, those sentiment readings are a self-fulfilling prophecy.

But while a short-term rally would be welcomed, for it to be sustainable it’ll need the economic fundamentals to back it up… Here’s a glimpse at what’s going on.

Rates Resting: Yesterday the Bank of England and European Central Bank announced that rates would remain unchanged – as expected. The decision suggests that the situation in the PIIGS countries is stabilizing.

Retail Sales Sour: June’s poor same store sales from major retailers this week drove home the fact that consumer spending has pulled back from the frenzy of 2009. Among the worst performers were mall apparel retailers. These numbers need to improve next month for any sort of sustainable jump in stock prices.

Jobs Continue to Be Less Bad: Jobless numbers were also announced yesterday, with both initial claims and continuing claims ringing in under estimates. But there’s still much further for these metrics to fall before we can celebrate.

Commodities Go Strong: Commodities – like crude oil and gold – continued to perform well in the increased volatility we’re seeing right now. The dollar is also a strong performer – if only thanks to investors’ exodus from the stock market right now.

Could Our Computer Science Play Double Our Money?

But not all of the news on Wall Street has been depressing – Computer Sciences Corporation (NYSE:CSC), the IT stock we picked up back in March 2009 for $34.19 per share, has been the topic of discussion lately…

Rumors are going around that defense industry giant Lockheed Martin (NYSE:LMT) could be interested in acquiring CSC for a price in the low $60s. The acquisition would make sense – Lockheed has been working to build its IT offerings and diversify away from the defense contracts that have built its nearly $30 billion business.

A buyout would be a coup for Rhino Stock Report readers who got in back in March – offering nearly double our money. But those rumors are just rumors for now, and I’m not recommending you increase your stake at current prices. I’ll keep a close eye on these developments.

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