Tuesday's Market: Fed Hopes vs. Earnings Warnings Yields Split Decision

The Nasdaq rose and the Dow fell as warnings by Merrill and others crimped enthusiasm ahead of a rate-cut move.
By Diane Hess ,

(Updated from 4:12 p.m. EDT)

Stocks climbed off their lows this afternoon, as the prospect of an interest-rate cut tomorrow eclipsed dreary corporate news.

Ahead of the

Federal Reserve's decision on monetary policy tomorrow, the

Dow Jones Industrial Average closed down 31.74 points, or 0.3%, to 10,472.48; it was off 107.15 points earlier in the day. The

Nasdaq Composite, however, finished up 13.8 points, or 0.7%, to 2064.6; it was behind 33.3 points at one point today. The

S&P 500 ended lower by 1.84 points, or 0.15%, to 1216.76.

For most of the day, buyers and sellers were caught in a game of tug-of-war. The buyers were compelled by positive economic reports on

durable goods orders, consumer confidence, and home sales, while the sellers were influenced by profit warnings from

Merrill Lynch

(MER)

and

Applied Micro Circuits

(AMCC)

.

In the last two hours of trading, however, stocks got a jolt. "People are getting optimistic ahead of the Fed's announcement," said Bob McCooey Jr., president of Griswold, a brokerage firm in New York. McCooey thinks the market could get what it wants tomorrow -- a half-percentage point cut. But McCooey thinks the Fed should show more restraint, saying he would be happier to see a quarter-percentage point cut.

The Fed kicked off its two-day

meeting today. Currently,

fed fund futures, a good proxy for monetary policy, are pricing in 100% odds of a quarter-percentage point cut and 40% odds of a half-percentage point cut. The central bank has already cut the

fed funds rate five times this year by a total of two-and-a-half percentage points to 4%.

"If the market gets a 50-basis point cut, it will trend upwards over the next few days," said McCooey. But he adds that volume, which was light today, will dry up over the next few days and may exaggerate market moves.

Beyond the Fed, investors have to contend with preannouncement season. Brokers were dragged lower today after Merrill Lynch said it expects second-quarter earnings to miss current analyst estimates of 82 cents a share. The company, which now expects earnings to come in between 52 cents to 57 cents per share for the quarter lost 11.4% to $58.91. The

American Stock Exchange Broker/Dealer Index

closed down 2.1%.

After the close of regular trading Monday, communications chipmaker Applied Micro Circuits

said its first-quarter earnings would fall below expectations, as "current business conditions continue to be very poor" and the process of reducing excess inventory is slower than expected. Despite the news, Applied Micro ended up 3.7% to $14.73.

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