U.S. Stocks Await Weekend Rescue From Current Stalemate

NEW YORK (MarketWatch) -- U.S. stocks are headed to an uncertain Monday, with investors looking for a weekend resolution to the Bush administration's rescue plan for Wall Street even as another major bank failure fueled worries of more collapses to come.

"Traders will probably trade small with the high drama in Washington going on. If we finally do get an agreement, the market will get the lift but it won't last more than a day before the reality of the poor economic backdrop and the upcoming earnings season comes into focus," said Elliot Spar, option-market strategist at Stifel, Nicolaus & Co.

On Friday, the Dow Jones Industrial Average ended higher for a second consecutive day, rising 118.20 points to 11,140.26 on hopes that Congress will come to an agreement on the rescue plan this weekend. The blue-chip index fell 2% for the week.

Of the Dow's 30 components, 19 ended higher, with financials leading the blue-chip turnaround. J.P. Morgan Chase gained 11%, while Bank of America Corp. climbed 6.8% and American Express Co. rose 4.4%.

The S&P 500 climbed 3.82 points to 1,213.00, giving it a weekly decline of 3.2%, while the Nasdaq Composite Index dropped 3.23 points to finish at 2,183.34, a weekly loss of 4%.

Trading volume was roughly half of what would be typical in a more normal trading week, with analysts attributing the decline to reluctance on the part of long-term investors to enter the fray.

"It's worth keeping in mind that this is a bear market that is accompanied by a recession, and you shouldn't be increasing allocation to stocks, but holding the line or reducing. What Washington can do is make this a little bit better or a great deal worse. They can grease the wheels of the credit creation mechanism some," said Hugh Johnson, chairman of Johnson Illington Advisors.

Crude oil for November delivery shed $1.13, or 1.1%, to close at $106.89 a barrel on the New York Mercantile Exchange. It ended the week with a gain of 4%. .

The dollar was slightly higher against the euro Friday but lost ground to the yen and pound, barely budging in the U.S. session as investors waited for developments on the proposed $700 billion financial rescue plan. .

Treasury prices rose, pushing yields down, as concerns about the economy resurfaced following mixed signals on the status of the rescue package intended to stabilize foundering financial markets. Two-year note yields fell 4 basis points, or 0.04%, to 2.11%. .

On Thursday, word that a tentative bailout deal had been reached unleashed a full-scale stock rally, with the Dow closing nearly 200 points higher and breaking a three-day losing streak.

The bank package, however, encountered resistance when a White House meeting blew up in acrimony, with House Republicans reportedly rejecting a demand by Democrats that they return to the table. Democratic leaders now say they won't bring the package to a vote unless Republicans support it. .

Adding urgency to the financial sector's dire straits was the move on Washington Mutual , with regulators seizing and then selling the bank to J.P. Morgan Chase & Co. for $1.9 billion. .

And, reports surfaced late Friday that Wachovia Corp. was in early merger talks with suitors including Wells Fargo, Citigroup and Banco Santander of Spain.

The week ahead brings a slew of economic data, including the employment report for September on Friday. Whether any of the reports prove to be market movers largely depends on if the rescue package is a done deal by the time the data are released.

"Recent data confirm that the economy is already slipping into a full-blown recession. With credit markets frozen, we think that failure to enact a bailout plan would almost guarantee that outcome," wrote Barclays Capital analyst Paul Sheard in a Friday note.

By Kate Gibson