Uphill climb for stocks even with relief plan

By Steven C. Johnson

NEW YORK (Reuters) - While a government plan to mop up billions of dollars of bad debt from bank balance sheets has lifted spirits, few on Wall Street will enter next week ready to declare a new bull run for the stock market.

That things are looking brighter than they did just days ago is without question. A week that began with the Dow tumbling 504 points in a day -- its worst performance since markets reopened after the September 11 attacks in 2001 -- ended with a sharp rally that left the S&P with its biggest two-day rally since October 1987.

The rebound came as governments worldwide unveiled a series of steps to free credit markets from a deep freeze and prevent a run on assets, from stocks to money market mutual funds.

U.S. and British authorities slapped temporary bans on short selling, while the U.S. Treasury said it would use $50 billion to back money market mutual funds, traditionally considered as safe as cash, whose asset values fell below $1 a share.

Questions remain, however, about the size and scope of the measures, as well as their ability to contain a credit crunch that has kept global markets lurching from one crisis to another for more than a year.

"The bottom line is, it doesn't do anything to address the genesis of the whole problem, which is housing," said Bill Strazzullo, partner and chief market strategist at Bell Curve Trading in Boston.

"It treats the symptoms, not the root problem. Housing prices will keep going down, and that means more bad loans, more write-downs, more pressure on bank balance sheets."

A sharp slide in U.S. housing prices and a subsequent rise in delinquencies on home loans has caused massive losses on mortgage-backed bonds that in recent years have spread across the global financial landscape.

Casualties have been piling up ever since. This week alone, Lehman Brothers declared bankruptcy, Merrill Lynch was pushed into a forced sale to Bank of America and the government bailed out insurance giant American International Group.

That's left investors reluctant to get too excited about the implications of the Treasury's bold new steps.

"It's like having a heart attack and you go and get your chest cracked open and get it fixed. But the next morning, you're still hurting," said Warren Simpson, managing director at Stephens Capital management in Little Rock, Arkansas.

"I think we're at the point where we are about to get our chest cracked open, but we're nowhere near healed yet."

Strazzullo said the Standard & Poor's 500 index would have to trade above 1,260 for at least a week and close above 1,290 to signal a sustained market turn.

"I want to see us clear that hurdle before I feel the worst is over," he said. "A day means nothing in this atmosphere. Two days ago, it looked like the world was coming to an end."

On Friday the Dow Jones industrial average .DJI closed up 368.75 points, or 3.35 percent, at 11,388.44. The Standard & Poor's 500 Index .SPX advanced 48.57 points, or 4.03 percent, to 1,255.08. The Nasdaq Composite Index .IXIC shot up 74.80 points, or 3.40 percent, to 2,273.90.