Bank rescue plan could extend gains

By Deepa Seetharaman

NEW YORK, Feb 8 (Reuters) - Investors are heavily betting the Obama administration's bank rescue plan, to be unveiled on Tuesday, will extend the stock market's rally into this week and bolster the fragile U.S. economy.

The broad KBW Banks index <.BKX> surged nearly 12 percent on Friday and major indexes also rallied late last week ahead of specifics from U.S. Treasury Secretary Timothy Geithner on the White House package to stabilize the financial system.

"(This) week could be one of the most important weeks for 2009," Thomas Lee, U.S. equity strategist for JPMorgan, said in a research note on Friday. "Whatever plan is unveiled, it will establish a framework to rehabilitate the financial system."

Equally important, Wall Street investors and traders will look to U.S. lawmakers to swiftly craft the $827 billion economic stimulus package brewing in the U.S. Senate, following a government report on Friday showing the biggest one-month job losses in 34 years.

The Dow Jones industrial average <.DJI> closed up 217.52 points, or 2.70 percent, at 8,280.59 on Friday. For the week, the Dow rose 3.5 percent, the Standard & Poor's 500 <.SPX> was up 5.2 percent and the Nasdaq Composite Index <.IXIC> saw its best week since early December, up 7.8 percent.

Overall, anticipation of the stimulus package and the bank rescue plan trumped the grim jobs report on Friday as well as an earnings season beset with unusually poor results and worse outlooks.

In the coming week investors will parse through corporate results from the likes of Dow component Coca-Cola Company <KO.N> and entertainment and media giant Viacom <VIA.N> for further details about corporate prospects in 2009.

So far, 286 companies in the S&P 500 have reported results for the latest quarter, with 58 percent beating estimates and 34 percent missing the median Wall Street forecast, according to Thomson Reuters data.

Illustrating the extent of the economic weakness will be the latest batch of data this week, including a report on international trade from the Commerce Department on Monday and a report on consumer sentiment due on Friday.

"It's going to be horrible news on earnings, it's going to be horrible news on economic statistics," said Michael Pento, a senior market strategist at Delta Global Advisors in New Jersey.

"The biggest thing I'm looking for is what form Timothy Geithner's plan is in," Pento said. "What does his bank rescue plan look like?"

TECH STOCKS A STANDOUT

Financials helped spur the rally late in the week, but the week's other standout was the technology sector.

So far this year the five biggest weights on the Nasdaq-- Microsoft Corp <MSFT.O>, Google Inc <GOOG.O>, Cisco Systems Inc <CSCO.O>, Oracle Corp <ORCL.O> and Apple <AAPL.O> -- have seen their shares rise, while the S&P 500 has fallen 3.8 percent during the same time.

In coming days, investors are looking to the Treasury to aid the battered banking sector, seen as key to invigorating the economy, now in the second year of a recession.

"Sentiment in the financial sector is very, very important, and we're all anticipating (the plan)," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois.

Treasury said last Monday that it had already disbursed $294.92 billion from the Troubled Asset Relief Program, but it has made further pledges that would leave it with about $320 billion to tap. The Treasury Department is due to release its January budget on Wednesday.

How the Treasury deploys the remaining $700 billion financial bailout, approved by Congress in October, will be outlined on Tuesday by Geithner.

The Obama administration on Sunday pushed back the announcement of the bank rescue plan from Monday as it pressed lawmakers to settle their differences over the huge economic stimulus package.

"It wouldn't surprise me if it had some kind of capital injections or some kind of government guarantees," Pento said.

He added that other measures were possible, such as "a plan to take these assets off the banks' balance sheets and put them in an aggregate bank that's owned by the government."

As for the stimulus package, top aides to President Barack Obama on Sunday urged Democratic and Republican lawmakers to set aside political differences and quickly approve the massive plan this week.

Squabbling will resume on Monday when the Democratic-led Senate, with the help of just a few Republicans, vote to end the debate on an $827 billion rescue package and clear the way for passage of the measure on Tuesday.

For stocks, any rally "has the potential to be sustainable because we've traded around here for a while," Nolte said.

"We could see the market, if we're successful in getting up around the 900 level on the S&P 500 to get up around 950 to a 1,000."

But others were more pessimistic about the restorative ability of the policy measures next week and beyond.

The stimulus plan "will leave us with a lot of debt," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Investors "have hopes that the steps taken in Washington, D.C., are going to help a second-half recovery and they'll be disappointed in the next couple months," he added.

"But not before a good, old fashioned bear market rally." (The Stocks Outlook column appears every Sunday. Comments or questions on this one can be e-mailed to deepa.seetharaman(at)thomsonreuters.com) (Editing by Leslie Adler, Maureen Bavdek and Bernard Orr)