stocks could resume rally on fed optimism

NEW YORK, March 20 (Reuters) - Bolstered by the Federal Reserve's
aggressive liquidity action, U.S. stocks could extend their solid
rally next week even in the face of still weak consumer and
housing-related data.

Friday, the Dow Jones industrial average <.DJI> soared 261.66
points, or 2.16 percent, to end at 12,361.32, capping one of the most
volatile weeks in U.S. financial market history. The Standard &
Poor's 500 Index <.SPX> also enjoyed ample gains at the end of a
holiday-shortened week, climbing 31.09 points, or 2.39 percent to end
the week at 1,329.51. The Nasdaq Composite Index <.IXIC> jumped 48.15
points, or 2.18 percent, to close at 2,258.11.

"This will be the bottom," said Mark Zandi, chief economist and
co-founder of Moody's Economy.com. "We got an incredibly aggressive
Fed and three to five years from now, we will realize that this was
the start of a bottoming process."

Stock investors already have been quick to sniff that out.

For the week, the Dow jumped 3.43 percent, the S&P 500 rose 3.21
percent and the tech-heavy Nasdaq Composite gained 2.06 percent.

Next week's barrage of economic indicators will include home
sales, durable goods orders, consumer confidence and spending, GDP
and some widely watched gauges of inflation.

But investors are likely to shake off these readings.

"There's a lot of bearishness built into expectations, so the
markets could respond positively if we get any better-than-expected news from these economic reports," said Keith Wirtz, president and
chief investment officer of Fifth Third Asset Management, which
manages $22.5 billion.

Overall, it was the Fed's aggressive moves that have made
investors increasingly confident about the stability of the markets.

"What the Fed did on multiple fronts will be an important moment
in time for equity investors," Wirtz said. "The Fed was trying to
blunt what could have been a snowballing effect of a lack of faith in
the financial system," he said.



FINANCIALS FLY, AND SO WILL STOCKS

Sunday, the Fed brokered a deal for JPMorgan Chase & Co.
to take over Bear Stearns , but it also dusted off a
Depression-era rule to let securities firms borrow directly from the
Fed through its discount window, usually reserved for commercial
banks.

Now any bank that needs cash can go directly to the Fed window
and exchange all kinds of collateral, such as mortgage bonds, for
highly liquid government securities. With those Treasuries, banks
then tap the $4.5 trillion repurchase market to exchange these for
short-term cash loans. That money can shore up balance sheets
depleted by the plunge in prices of mortgage-backed securities and
other risky investments.

That's not all.

On Tuesday, the Fed cut interest rates by three-quarters of a
percentage point, the sixth time it has slashed its fed funds rate
target for overnight bank loans, to 2.25 percent.

Moreover, the regulator of Fannie Mae and Freddie Mac, the top
providers of funding for U.S. residential mortgages, relaxed their
capital rules and gave them permission to pump $200 billion more into
the struggling U.S. mortgage market.

Proof that the Fed's medicine is taking effect?

Financial stocks and the broader market broke their three-week
losing streak. Lehman Brothers and JPMorgan both rose for the
week by 24 percent and 26 percent, respectively. Goldman Sachs
shares posted gains of 14.52 percent for the week.

"The market has received a lot of support and it should help thaw
the frozen credit markets, which could help this market," said Alan
Gayle, senior investment strategist at Trusco Capital Management in
Atlanta.



SOME GOLDEN OPPORTUNITIES

Like many investors, Wirtz of Fifth Third said he is buying U.S.
stocks.

"We are starting actually to buy equities this week," he said.
"They've got to distressed valuations and the opportunities were too
great to ignore."

Bob Doll, vice chairman and global chief investment officer of
equities at BlackRock Inc, which manages more than $1.1 trillion in
assets, told Reuters that he believes the bottom is in the making and
added that he's been buying financial stocks "on weakness."

As for weakness in economic data, there will be pockets. But
investors are closely watching on Friday, when the core PCE price
index, the Federal Reserve's preferred measure of inflation, will be
released as part of the report on personal income and consumption.
(PCE, of course, stands for personal consumption expenditures. The
core reading strips out volatile food and energy prices.)

In February, core PCE is expected to be up 0.1 percent, compared
with a gain of 0.3 percent in January.

Despite the expected moderation, inflation is still edging beyond
the Fed's comfort zone, tagged at 1.5 percent to 2.0 percent.