The Wall Street Journal-20080215-Lack of Commitment Keeps Stocks From Engaging Rally

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Lack of Commitment Keeps Stocks From Engaging Rally

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Even as Federal Reserve Chairman Ben Bernanke signaled more interest rates cuts are in store to help stabilize the economy and financial institutions, stock prices sank yesterday, reflecting the difficulty that the market is having getting traction.

In the weeks since a selloff sent the Dow Jones Industrial Average to within a hair of official bear market territory, which would be down 20%, stocks have shown resilience. Yesterday's losses, with the DJIA falling 175.26 points or 1.4% to 12376.98, showed stocks are struggling to attract committed buyers.

Earlier this week investors shrugged off bad news such as new problems in the credit markets -- and instead focused on positives such as better-than-expected January retail sales. The Dow rose 3% in three days. Meanwhile, there was some good news as financial firms trying to raise capital shore up their balance sheets, such as MBIA Inc., found accommodating investors.

That led to some to wonder if the worst of the stock market's declines were over. But yesterday was a different story. Over the course of the day, stock traders brushed aside Mr. Bernanke's hints at further rate cuts and news of a decline in weekly initial jobless claims that suggest the economy may not be in as bad shape as some fear.

Instead the focus was on the negatives, such as yesterday's announcement by UBS AG of a $13.7 billion write-down due to losses on mortgage backed securities. Late in the session, selling accelerated when Moody's Investors Service cut its rating on bond insurer FGIC Corp. because of the firm's backing of mortgage debt.

While there is no scarcity of cross currents, the one thing in short supply is conviction."The level of uncertainty is as high as I've seen it since the credit crunch started to happen," says Todd Steinberg, head of equities and derivatives for the Americas at BNP Paribas.

The financial sector-led selloff sent the Standard & Poor's 500 stock-index down 18.35 points, or 1.3% to 1348.86. The Nasdaq Composite Index was off 1.7%, or 41.39 points, at 2332.54.

Adding to the reluctance to make bets is that many traders are still licking their wounds from losses in January, when trends that seemed rock-solid to start the year were upended late in the month. Many hedge funds had bet that financial and consumer-dependent stocks such as retailers were going straight down.

Strategies that sought out stocks attractive on a valuation basis, such as price to book or sales to book were out of favor. Instead, growth stocks such as technology firms, whose earnings would stand out in a slumping economy, were seen as likely winners.

But when the Fed cut rates in late January the result was a violent reversal of those trends -- tech stocks slid and financials soared. "You had massive sector rotation," says Matthew Rothman, global head of quantitative equity strategies at Lehman Brothers. "It caught a lot of people off guard."

Even hedge funds, which generally are able to profit from falling markets by selling securities short, had nowhere to hide as losses on the stocks they owned outright outweighed their shorts. In February, the funds haven't made up much lost ground.

Against this backdrop, many hedge funds have scaled back on leverage and a number have double-digit stockpiles of cash. "Nobody likes being in cash," says Alex Ehrlich, global head of prime services at UBS. But "this is an environment where people are finding it difficult to have a high degree of conviction."