BT: Wall Street hoping worst is over (21 Jul 2008)

Wall Street hoping worst is over

By ANDREW MARKS
NEW YORK CORRESPONDENT

FRESH off an unexpectedly strong rebound for US stocks over the last three trading sessions, Wall Street enters the heaviest week for second-quarter earnings on a hopeful note. Investors will be watching to see whether last week's rally might just be the beginning of a sustained comeback from the stock market's woes of the past two months which had brought stocks to their lowest levels of the year and plunged all three major US equity indexes into bear market territory.

Buoyed by better than expected results from several major banks and plummeting oil prices, stocks bounced back from a rough Monday, in which the financial sector plummeted 6 per cent, its biggest loss in more than eight years as investors were unimpressed with the government's proposal to prop up embattled mortgage companies Freddie Mac and Fannie Mae.

Wells Fargo's estimate-beating results on Wednesday combined with the Security and Exchange Commision's restriction on 'naked' short selling in 19 financial companies sparked a reversal of fortune that helped banks lead the rally as the financial sector surged 12.3 per cent Wednesday alone, its largest single day percentage gain ever. It was followed by positive results from JP Morgan and Citigroup.

'We got some signs this past week that maybe, just maybe, we've hit the bottom, that stocks are not necessarily going to be going straight up from here. I don't believe that's going to be the case at this point but that the market is going to start putting in a base from here - which means big potential upside for those willing to dip their toes in and start bargain hunting,' said Marc Pado, investment strategist at Cantor Fitzgerald.

But as Mr Pado warned in his next thought, Wall Street will remain cautious, mindful that last week's bounce might be nothing more than a bear market rally that will fizzle in the heat of the next wave of big write-offs, near-failure or resurgence of oil prices. 'There are still so many scenarios in which the market can start sinking again that I would advise people to be very selective in their buying,' he said. 'This is not going to turn overnight into a market-wide rally.'

Indeed, for all the talk of finding things to like in quarterly earnings reports, particularly in the banking sector, traders pointed out that the week's surge coincided with a dramatic dip in oil prices. Futures contracts for sweet crude finished the week at US$128.88 a barrel, a whopping US$16, or 11 per cent decline, from last Friday's close of US$145.08 a barrel.

'If we don't get the drop in oil prices, we don't get the rally in stocks - simple as that,' said Tom Knowles, a trader with Evergreen Securities. 'I don't care how pleased investors were that Citigroup 'only' lost US$2.5 billion last quarter. This is still an oil-trading stock market, and it will be until the volatility in oil prices stabilises,' he said.

Mr Knowles and others did acknowledge, however, that the plunge in oil prices came courtesy of fresh signs of fragility in the US economy last week with reports of strong rises in both producer and consumer prices, and a big drop in a key manufacturing index.

On Friday, the Dow Jones Industrial Average gained 47.63 points, or 0.4 per cent , to 11,496.57, and the S&P 500 tacked on 0.36 points at 1260.68. The Nasdaq sank 29.52 points, or 1.3 per cent, to 2282.78.

The mixed results ended a strong week for the major indices, ending losing streaks that have lasted a month or more. Over the past five days, the Dow climbed 3.6 per cent, the S&P 500 jumped 1.7 per cent and the Nasdaq added 2 per cent.

This week is another big one for financial companies reporting their second-quarter results, and investors will be keying in on the money centre and regional banks.

But last week's earnings misses by tech sector heavyweights Google, Microsoft and AMD that caused the Nasdaq Composite to slump on Friday reminded investors that not just energy and financials can move the markets. A total of 158 S&P 500 companies are due to report this week.


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