Wall Street Gets Rescue, But What About Stocks?

Tuesday, Oct 7, 2008  |  Updated 11:13 AM EDT
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Stocks may get a short-term boost from today's approval of a $700 billion financial rescue package, but the longer-term outlook is far less certain.

 

With continued weakness in the economy and still-tight credit, market watchers remain skeptical that the bailout will provide the balm that the stock market needs to stage a long-term recovery.

Instead, some wonder whether the bill's passage will inspire little more than a sell-the-rally moment on Wall Street that will leave stocks mired in their current state.

That was already evident in the market reaction to House passage of the bill. After nearing a 300-point rally on expectations the bill would pass, stocks quickly pared their gains after the vote took place.

The dollar fell against the euro while oil prices fell back.

"We've still got the same credit crisis that exists, so we're still going to have to work our way out of that," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "We're in a hole that's been created by the credit crisis. Although the Fed and the government have lowered a ladder, it's still going to be hard to get out of that hole."

As the market pores its way through the final product that Congress approved, Wall Street will see some positives and some negatives, and those in turn will cause more gyrations in trading, Sparks says.

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"I see the market continuing as it has with the swings in both directions," he says. "Until the market can see something six or nine moths out that looks like better days are ahead, it's still going to be a bumpy ride."

Economy Remains Big Concern

On the trading floor there's a pervading sense that the market will surge for a few days, then drop back into familiar territory as the concerns over unemployment and the broader economy continue.

On Friday, the US government reported a bigger-than-expected decline in September jobs while the services sector barely showed any growth. Both suggested that the weakening economy is headed for a recession.

That spells trouble for those looking to Wall Street for a prolonged push higher.

"Definitely sell-the-rally mentality," Dave Rovelli, managing director of US equity trading at Boston-based Canaccord Adams, says in describing the trading mood Friday. "The economy is in disarray to put it lightly. Unemployment wasn't that bad but the change in nonfarm payrolls was a disaster. We're definitely showing signs of a recession."

While long-term investors may find this a time to hunt for beaten-down stocks, those looking for a faster return will be hard-pressed.

"This (rescue plan) is going to hopefully prevent the credit markets from seizing up," Rovelli says. "But did it really change anything about the economy."

 

A number of observers, including bond manager Pimco's founder Bill Gross, see the bailout as helping banks shore up their balance sheets but coming up short in addressing credit concerns and getting institutions back in the lending business.

Some are calling for more aggressive action by the Treasury, perhaps through a government bond auction, to inject the needed liquidity into the market.

Economy is still weighing on Wall Street. See video at left.

"I think that would go a long way towards easing this," Andrew Busch, director of BMO Capital Markets, said on CNBC. "I don't think (stock gains are) going to last until they address the credit problem."

Aggressive action from global central banks combined with the liquidity the bailout could generate are seen as helping but primarily from a psychological standpoint.

"The market still has to deal with a host of issues," says Quincy Krosby, chief investment strategist at The Hartford. "If this can help open the credit markets and get money flowing again, in essence bringing back confidence, it will be a tremendous step forward."

Breaking Resistance the Key

But for the market to sustain a rally it will have to break through resistance levels posted after the July lows and hold them. That would generate confidence among investors.

"We're still in a bear market technically. It's a technical market and if you start to break through what's been resistance in the short run, I think you can say this market will have legs," says Michael Cohn, of Atlantis Asset Management. "If you can look ahead, we might see that there's real light at the end of the tunnel."

 

Options trading with a sentiment that the Volatility Index (Chicago: VIX) is headed lower while the Standard & Poor's 500 will move well above fair value by December have Cohn encouraged that the market is headed for better things over the long term even if things might be more tenuous until the Nov. 5 presidential election passes.

Cohn sees moving comfortably past the 11,500 to 11,600 level of the Dow Jones Industrial Average as a key to what will happen. He says he's going to be buying stocks and capitalizing on a post-election rally.

"After the election I think we could be off to the races, so I'm pretty bullish here," he says. "If they can come up with a package that doesn't go way beyond over-regulated, I think we can see some light at the end of the tunnel."

For more stories from CNBC, go to cnbc.com.

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