Stocks Rise, Rebound Hopes Gain Traction
By Haitham Haddadin
Wednesday August 21, 5:02 pm Eastern Time
NEW YORK (Reuters) - Stocks rose on Wednesday as a day of choppy trade concluded on an upswing, with investors betting that the market's recovery from a midsummer plunge will gain traction.
"The market realizes that an awful lot of negative news has been embedded in prices," said John Davidson, president and chief executive of PartnerRe Asset Management. "The extreme negativism in the market is dissipating and that's allowing the market to move higher."
Wall Street also welcomed news that giants AOL Time Warner (NYSE:AOL - News) and AT&T Corp. (NYSE:T - News) reached a $9 billion deal that dissolves a complex partnership that has cast a pall over both companies.
The technology-laced Nasdaq Composite Index (NasdaqSC:^IXIC - News) rose 32.65 points, or 2.37 percent, at 1,409.24, according to the latest available data. The Dow Jones industrial average (CBOT:^DJI - News) moved up 84.95 points, or 0.96 percent, at 8,957.02, after moving in and out of positive territory. The broad Standard & Poor's 500 Index (CBOE:^SPX - News) ended up 11.93 points, or 1.27 percent, at 949.36.
With no key economic reports to help drive trading, investors listened closely to comments from three regional Federal Reserve bank presidents, whose remarks were seen as hinting that the economic recovery is on track and the U.S. central bank may not need to cut interest rates.
Federal Reserve Bank of Philadelphia President Anthony Santomero said the economic recovery, while more moderate than expected, should move forward and that the Fed's current policy stance is appropriate.
Many investors are increasingly convinced a bottom has been reached in the market and are picking up stocks at relatively cheap prices, said Rick Meckler, president of investment firm LibertyView. "But there are still some stories that have made it a mixed bag."
Gains in AOL and AT&T helped lift Wall Street's mood after news the two companies will unwind a 10-year-old partnership in an estimated $9 billion deal that will help AT&T trim its debt and simplify AOL's corporate structure. AT&T jumped $1 or 8.9 percent, to $12.18, lifting the Dow, while AOL stock climbed 97 cents to $14.33.
Electronics retailers took a hit after RadioShack Corp. (NYSE:RSH - News) cut its earnings forecast. Investment banks and brokerages were under pressure after Salomon Smith Barney cut its investment ratings on several stocks in the sector, including Goldman Sachs (NYSE:GS - News), Lehman Brothers (NYSE:LEH - News) and Merrill Lynch (NYSE:MER - News).
Airline stocks helped bolster the market despite industry data that showed the industry is still in turmoil. The main airline trade group said the amount of money taken in for each mile flown nationwide in July was down 8.7 percent year over year.
But a rosy earnings report from German airline Lufthansa (XETRA:LHAG.DE - News) helped spur buying in the sector, analysts said. Delta Air Lines (NYSE:DAL - News) rose $2.49 to $19.12, while the S&P airline index (^GSPAIR - News) bolted 12.1 percent higher.
Swedish telecom equipment heavyweight Ericsson (NasdaqNM:ERICY - News), surged on the back of gains in its local market on talk that institutions were calling in shares lent to short sellers. Ericsson's U.S.-traded shares jumped 12 cents, or 19 percent, to 75 cents on the Nasdaq.
Helping the Dow, Home Depot (NYSE:HD - News) rose $2.43 to $32.68, a day after the home improvement retailer posted a sharper-than-expected 28 percent gain in earnings.
The retailing sector also got a boost from solid results from other companies in the sector and Goldman Sachs' initiation of research coverage on 10 specialty stores.
Gymboree Corp. (NasdaqNM:GYMB - News), among those started by Goldman, jumped $1.45 to $16.35, or 9.7 percent. Late on Tuesday, Gymboree reported a narrower loss.
But financial companies took a hit. Goldman Sachs (NYSE:GS - News) fell 63 cents to $79.88, and Lehman dropped $2.20 to $58.98.
RadioShack Corp. (NYSE:RSH - News) sank more than 16 percent, after the third-largest U.S. consumer electronics retailer lowered its quarterly earnings outlook, saying sales have weakened dramatically in August. It fell $4.74 to $24.21.
Some market watchers, taking a more cautious view, said a pullback by stocks was possible.
The big rally in bonds as stocks fell in the spring and early summer has meant that institutional funds are forced now to make asset allocation moves out of bonds into stocks. That has fueled the summer rally on Wall Street, Tony Dwyer, chief market strategist at Kirlin Holdings, said.
"Many of these funds have preset asset allocations of say 20 or 30 percent bonds, but the rally in bonds created a situation were some of them were 40 percent long bonds, so they have to cut back and buy stocks," Dwyer said.
"So the rally is not based on economic fundamentals. For the time being, it may grind its way higher 5 or 10 percent over a few months, but I am looking for a pullback."
Investors have been breathing easier about issues related to questionable accounting in recent days, although their worries have not completely evaporated.
The question of corporate corruption came full circle, analysts said, after Michael Kopper, a former executive at Enron Corp. (NYSE:ENE - News),ENRNQ.PK>, which was one of the first companies to shake investors' confidence with its scandal and spectacular collapse, admitted to a criminal role in the energy giant's demise.
Some pundits saw technical factors at play.
"It's been a very positive rally but I think it is the first rally within a bottoming process," said Ken Tower, chief technical analyst at CyberTrader Inc. of Charles Schwab.
"In the last couple of days you are hitting resistance and that's why the market is having trouble going higher," he said, referring to technical levels where sellers emerge. He put resistance at 950 for S&P and 9,000 for the Dow. Nasdaq, by the close, was a tad above key resistance in the 1,400 point area. |
