Wall Street edges higher

Wall Street closed mostly higher today as investors appeared relieved that more bad news did not emerge about risky mortgages and shrinking credit markets. Investors seeking safety pressed into shorter-term Treasurys.

Stocks endured back-and-forth trading following a rally on Friday, which came in response to the Federal Reserve’s decision to lower its discount rate.

The Fed said today it stood ready to make further moves to keep credit and stock market losses from hurting the economy, but because it stopped short of a cut in the more important federal funds rate, uncertainty lingered on Wall Street about policymakers’ intentions.

The Fed is not scheduled to meet formally until September 18, which means investors could remain jittery until then.

Brian Levitt, corporate economist at OppenheimerFunds, said the Fed’s move, while helpful, will not erase all the market’s unease.

“Fed action certainly doesn’t make unsound credit sound. It allows some confidence for the higher quality deals to get done. It’s more psychological. It provides confidence that the Fed will be a stop-gap and a lender of last resort.”

Treasury bonds, which have rallied in recent weeks as investors fled to safe-haven securities, continued their move higher today. Because bond prices move opposite their yields, the benchmark 10-year Treasury bond yields fell to 4.65% from 4.68% late on Friday, while the shorter-duration notes such as the three-year T bill saw yields fall sharply.

The Dow Jones industrials finished up 42.27, or 0.32%, at 13,121.35, after seeing 100-point swings higher and lower.

Broader indexes were mixed. The Standard & Poor’s 500 index slipped 0.39, or 0.03%, to 1,445.55; the Nasdaq composite index rose 3.56, or 0.14%, to 2,508.59.

Today’s erratic trading was not unexpected; analysts had questioned how much conviction buyers had on Friday, as much of the rally was pinned on big institutional investors like hedge funds buying shares to cover their positions. Some investors had been shorting the market – betting stocks would move lower - and were caught off guard when the central bank cut the discount rate.

“There’s a lot of uncertainties out there,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners. “The question is if the Fed did enough to satisfy the markets. Wall Street will be relentless until they cut the fed funds rate.”

At the market open today, the Fed also announced it injected another 3.5 billion dollars into the banking system. The central bank has infused the market with nearly 120 billion dollars of liquidity in recent weeks.

Light, sweet crude fell 90 cents to 71.08 dollars on the New York Mercantile Exchange. Investors have been wary as Hurricane Dean has moved towards Mexico, where major oil companies have already begun battening down oil rigs in the Gulf of Mexico.

The dollar was mixed against major currencies, while gold prices rose.

This week will be light on economic reports, which makes it a bit more difficult for investors to assess what the Fed might do at its rate-setting meeting. In one economic reading that arrived today, the Conference Board said its gauge of future economic activity moved slightly higher in July.

The research group’s index of leading economic indicators rose 0.4% in July, as analysts expected. The index fell 0.3% in June, after rising 0.2% in May. The report is designed for forecast economic activity over the next three to six months.

With earnings season mostly wrapped up, there was little in the way of corporate news for investors to go by. August is typically one of the slowest periods for equities markets.

Thornburg Mortgage fell 1.54 dollars, or 10.2%, to 13.50 dollars after the company said it sold 20.5 billion dollars of its safest investments to raise enough cash to allow the mortgage lender to operate amid a crisis in the mortgage industry.

Among the sectors holding the market back was financial stocks, which spiked on Friday after the Fed announcement. The downtrodden sector stands to benefit from the Fed’s discount rate cut. Goldman Sachs Group fell 2.24 dollars to 172.76 dollars, while Citigroup dropped 42 cents to 48.39 dollars.

Deutsche Bank shares fell 2.59 dollars, or 2%, to 126.10 dollars after the Financial Times reported the bank had heeded the Fed’s request by going to its discount window to borrow money. The discount rate covers loans the Fed makes to banks.

Lowe’s, the number two US home improvement chain, reported a second-quarter profit that surpassed Wall Street projections. Despite the slumping housing market, the company said it will open 40 stores during the current quarter, and believes sales will rise 6% for the year. Lowe’s shares rose 1.63 dollars, or 6.1%, to 28.50 dollars.

Advancing issues outweighed decliners by about 3 to 2 on the New York Stock Exchange, where volume fell to 1.54 billion shares – typical of an August session – from a heavy 2.48 billion shares traded Friday.

The Russell 2000 index of smaller companies rose 1.42, or 0.18%, to 787.45.