Published October 30, 2008

Waiting for Bernanke: Wall St pauses after Tuesday's big rally

Investors hold fire as they wait for rate cut, market reaction

By ANDREW MARKS
NEW YORK CORRESPONDENT
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WALL Street opened lower yesterday after the huge rally that sent the major stock indexes surging on Tuesday. The Dow Jones Industrial Average was off 32 points or 0.35 per cent at 9,018 just after the opening bell, while the S&P 500 was down 7.3 points or 0.75 per cent at 933 and the Nasdaq Composite dropped 20 points to 1,630.

But by 10 am, the losses had eased. The Dow was off a mere seven points or 0.08 per cent at 9,057.95, while the S&P 500 was off just three points or 0.32 per cent and the Nasdaq was down about 0.5 per cent as players awaited word from US Federal Reserve chairman Ben Bernanke on a widely anticipated interest rate cut tipped to take the federal funds rate down 50 basis points to just one per cent.

Many Wall Street analysts are looking at yesterday's action as a major indicator for the market's direction for the next few weeks. 'The key to understanding the importance of Tuesday's rally is how the market closes on Wednesday, after the Fed's expected rate cut,' said veteran market strategist James Awad of Zephyr Management.

'We had a rally like this two weeks ago and it didn't hold,' he said. 'But if the major indexes close on Wednesday at or near the highs we reached on Tuesday, it would be a very good sign that the market's psychology is shifting from a short-term and fear-based mode to a longer-term and fundamentals-oriented approach. That's the shift we need to see before we can truly say that stocks have bottomed.'



Mr Awad reckons the market is likely to see another round of short-term selling that will test its lows, before starting a careful base-building rally around the end of the year.

On Tuesday, stocks in New York stormed on a huge wave of buying in the final hours of trading to close the day with near record gains. The Dow soared 889.35 points or 10.9 per cent to 9,065.12, the S&P 500 added 91.59 points or 10.8 per cent to 940.51 and the Nasdaq jumped 143.57 points or 9.5 per cent to 1,649.47.

The Dow's rise marked the second biggest single-day point gain in its history of the index, bettered only by its 936.42-point rise just two weeks ago on Oct 13.

The market's subsequent inability to sustain the Oct 13 rally has left many Wall Street analysts sceptical that the surge on Tuesday marked the end to the bear market.

'Just as it was important to understand the sky wasn't falling when stocks fell so hard and so fast these last few weeks, we can't assume based on one day of mostly short-covering buying that the worst is over,' said Tobias Levkovich, chief market strategist at Citigroup.

'We still have a great deal of uncertainty to work through on the depth and severity of the recession before investors will stop expecting another foot to drop in the form of another financial meltdown.'

Indeed, that combination of uncertainty on the economy and the strong likelihood of further deleveraging and redemption-led sell-offs by hedge funds and private equity firms makes many Wall Street market strategists doubt that Tuesday's thunderous rally marked the absolute bottom.

'I won't be surprised to see stocks make new lows from here,' said Zephyr's Mr Awad.

But while most money managers won't be surprised to see another short-term sell-off, many believe this second phase of the stock market's decline should end in coming weeks.