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NYSE: Wall Street struggling to discern 'top' from 'bottom'

As Wall Street appeared to settle down from a period of intense volatility, investors are debating whether the latest pause represents a "top" or a "bottom" for the market.

Even as markets brace for a likely US recession, some argue that the bad news has essentially been priced into shares, which would mean a potential rally in anticipation of an economic recovery. Others say caution is warranted.

In the week to Friday, the Dow Jones Industrial Average fell 1.17 percent to end the week at 12,216.40.

The tech-heavy NASDAQ composite managed a slight gain for the week of 0.14 percent to 2,261.18 and the Standard & Poor's 500 broad-market index fell 1.07 percent to 1,315.22.

The relative calm of the past week allowed the market to digest the US Federal Reserve's efforts to get credit flowing in the world's biggest economy by slashing interest rates and opening its lending to troubled investment firms that are able to pledge troubled mortgage securities as collateral.

"Since the middle of March, the tone in the stock market has been decidedly more positive," Linda Duessel at Federated Investors said.

"Give a lot of the credit to the Federal Reserve, which has facilitated the acquisition of a failing investment bank, provided new liquidity facilities, and extended credit to primary securities dealers. Oh, yes, the central bank also has cut interest rates by three full percentage points since September," she said.

A big question for the market is whether the credit markets will stabilize and allow a fragile US economy to rebound.

"The week ahead will be spent trying to determine whether we are experiencing a bear market rally or if the market has been setting us up for a cruel April fool's prank," analysts at Wachovia Securities said in a research note.

Sal Guatieri at BMO Capital Markets said a recovery in the economy and markets needed more time.

Guatieri said despite the Fed's "heroics to save the financial system," the latest data showing a fragile US housing market "provided a stark reminder that policymakers, while treating the symptoms, have not yet cured the disease -- which is the cancer in housing markets."

Donald Ratajczak, economist at Morgan Keegan, also worries that the worst may not yet be over even though stocks have been hammered in the first weeks of the year.

"Are we in a dead cat bounce or the end of the the market contraction? One of my concerns has not been resolved. Earnings projections remain too high," Ratajczak said.

The yield on the 10-year Treasury bond rose to 3.466 percent from 3.328 percent a week earlier, while that on the 30-year bond increased to 4.345 percent against 4.165 percent.
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