Clock Runs Out on Rate-Cut-Based Market Rally

The four-day bank stock rally spurred by the Federal Reserve's surprise Oct. 15 rate cut ran out of steam Wednesday.

"Nothing lasts forever," said banking analyst Sally Pope Davis of Goldman, Sachs & Co. "These stocks have had a good run. Many investors feel they've been to hell and back in this market. They're taking profits."

The letdown did not surprise analysts, who had cautioned that the glow from the Fed's sudden move last week-its second quarter-point cut in a short-term rate in a little more than two weeks-would eventually wear off.

"Just as the market overreacted on the downside to overseas turmoil, it overreacted on the upside to the rate cut," said industry analyst Charlotte Chamberlain of Jefferies & Co. of Santa Monica, Calif.

The Standard & Poor's bank index fell 1.54%, and the Nasdaq bank index, 1.90%. The Dow Jones industrial average rose 0.16%, and the S&P 500 index, 0.56%.

Bank analyst Stephen Biggar of S&P Equity Group said the "euphoria" of strong third-quarter bank earnings is also ending, but he said he doubted it would translate into a protracted market decline.

"Problems overseas are already ingrained in the bank stocks," said Mr. Biggar. A new crisis would be required to bring the stocks down substantially again.

Traders acknowledged the slide in bank stocks was profit taking but noted that investors generally remain wary. "People overbought, and so it is healthy for them to take something off the table," said one trader. "But there is still nervousness about which way the market is going to go."

The result is continuing volatility in the sector.

Though Washington Mutual Inc., Seattle, reported strong earnings late Tuesday and management gave a favorable outlook for its integration of H.F. Ahmanson & Co., the stock fell on heavy volume.

Analysts said the bellwether stock had shot up on the two Fed rate cuts, which are expected to ease pressure on thrift earnings. But investors decided Wednesday that Washington Mutual's own earnings were already more than factored in to its stock price.

Washington Mutual shares plummeted $3.1875, to $38.0625.

"The stock ran up almost 50% in the last two weeks on investor exuberance over the Fed's rate cuts," said Ms. Chamberlain. "Basically it was overbought."

Another big loser was Republic New York Bank Corp., which tumbled $2.9375, to $42.375, after missing analysts' consensus earnings estimates. U.S. Bancorp, Minneapolis, a solid earnings performer, lost $1, to $41.375, after bank analyst Joel Silverstein downrated the company, citing its lofty valuation.

But evidence of market optimism remained. Gainers included Bankers Trust Corp., up $1.1875, to $60.25, and Chase Manhattan Corp., 93.75 cents, to $54.

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