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Dow up but analysts warn there could be more upheaval yet

NEW YORK -WALL Street is heading for another volatile week, but the bulls could get a further reprieve if calm brought on by the Federal Reserve’s liquidity injections and a surprise cut in its discount rate lasts.

The coming week will see the release of a slew of economic indicators, including July existing home sales and preliminary figures on second-quarter gross domestic product, which should shed more light on the economy’s health.

On Friday, the Dow Jones industrial average shot up 142.99 points, or 1.08 per cent, to end at 13,378.87.

The Standard & Poor’s 500 Index climbed 16.87 points, or 1.15 per cent, to finish at 1,479.37.

The Nasdaq Composite Index rose 34.99 points, or 1.38 per cent, to close at 2,576.69.

But analysts warn there could yet be more upheaval, as weakness in the housing industry still pervades the market and could make for cautious trading ahead of the Labour Day holiday on Sept 3.

Lots of economic numbers and exceptionally light volume often is a recipe for volatility. The Chicago Board Options Exchange Volatility Index (VIX), also known as Wall Street’s fear gauge, ended Friday at 20.72, down 8.4 per cent.

The VIX is down almost 45 per cent from Aug 16, when it climbed to 37.50, a five-year high.

More worrisome, analysts and money managers said, would be any news that pointed to further turmoil in the sub-prime mortgage sector. This past week, several mortgage providers, including Accredited Home Lenders Holding, said they were cutting hundreds of jobs as the lending squeeze and lingering jitters in the credit markets take their toll.

Still, surprisingly strong data on July new home sales and durable goods orders contributed to the market’s calmer tone last week.

Mr Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray, in Minneapolis, said the jobs report, due a week before the Fed’s policy-setters meet on Sept 18 to decide on interest rates, is among the data that may seal the market’s fate in the weeks ahead, along with reports on housing.

As he put it: ‘If those numbers turn south, that’s going to really increase recession fears.’

Source: Reuters (The Sunday Times 26 Aug 07)

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