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June 30, 2001

Delayed reaction to Fed rate cut highlights Wall Street's trading-range woes

LISA SINGHANIA

Canadian Press

NEW YORK (AP) - An interest rate cut by the Federal Reserve is usually cause for celebration on Wall Street. But investors had to sleep on it before rallying the day after the Fed's sixth rate reduction of the year.

Analysts weren't surprised by the cautious response to Wednesday's move by the central bank: the market has become convinced that better corporate earnings, not monetary policy, will presage any business turnaround.

"We still haven't seen the effect of the initial rate cuts, so it's harder to get excited about the sixth one," said Rafael Tamargo, director of equity research at Wilmington Trust.

The quarter-point rate reduction also had been widely anticipated, meaning investors had discounted cheaper short-term money ahead of the official announcement.

And the cut was smaller than the half-point reduction the market had wanted.

What changed?

"I think people thought about it overnight and realized it didn't matter" that the cut was smaller than expected, Tamargo said.

"What mattered was that the Fed had made the cut and indicated it would cut again if necessary."

Still, the market's reaction illustrates one of the frustrating truths about Wall Street in an economic downturn.

Although the Fed's interest rate cuts have provided a buffer against strong selloffs by reassuring investors that help is on the way, the reductions haven't provided a catalyst for a significant and sustainable rally.

Instead, with more than 600 corporate warnings in the quarter just ended, the market has become even more hesitant to commit to stocks of companies that can't demonstrate their performance will soon improve.

Analysts say the market is mired in a trading range, with the averages unable to advance or fall below a certain level.

The Dow Jones industrials, for example, have been trading between 10,500 and 11,400 since mid-April. The Nasdaq has been hovering between 2,000 and 2,300, while the Standard & Poor's 500 index has traded between 1,200 and 1,300.

"In a trading range, people generally trade off extremes in investor sentiment," said Richard Cripps, chief market strategist at Legg Mason in Baltimore.

"What we've seen this week is a market that had become oversold and negative, so people started buying. They'll sell when the market becomes too high. But the overall market won't advance beyond that."

Don't expect the time of year to help either. Summer is traditionally a slower time for Wall Street and business deals. Trading volumes tend to decrease.

All of these factors played a role this past week.

So did news that a federal appeals court had reversed a lower court ruling that ordered the breakup of Microsoft. Analysts say bargain hunting influenced trading, too.

The end of the quarter was still another contributor. With the second quarter ending Friday, money managers spent the early part of the week adjusting their portfolios. As the week wore on, that pressure decreased, allowing stocks to advance somewhat.

New earnings warnings on Friday dampened enthusiasm somewhat, although the indexes managed moderate gains. Trading volume was also light before the Independence Day holiday.

"The problems still remain, and until there's solid signs that the economy and earnings are improving, the sustainability of any advance is going to be questionable," said Charles White, portfolio manager for Avatar Associates.

For the week, the Dow lost 102.19, or 1 percent, after dropping 63.81 to 10,502.40 on Friday. But the Nasdaq gained 125.70, or 6.2 per cent, for the week, following a 35.08-point gain to 2,160.54 Friday.

-- (M@rket.trends), June 30, 2001