Investors cash in some gains from big rally

Caution reasserted itself on Wall Street, sending stocks down sharply but not enough to stop the market from notching its third straight weekly advance.

Major indexes fell about 2% on Friday, but most analysts agreed the pullback was a natural response to the market’s powerful climb this month. Financial and technology stocks led the retreat, and energy shares fell along with the price of oil.

A decline in personal incomes and a slowdown in personal spending gave investors reason to cash in some of their winnings after the Dow Jones industrial average surged 21% over just 13 days. Analysts said the sentiment in the market was still more upbeat than it was a month ago, but the data were a reminder that the economy and the banking system remain troubled.

“There is still a definite caution in the air,” said Doreen Mogavero, president of Mogavero, Lee & Co., a New York floor brokerage, adding that she’s noted some hesitation among her clients. “I don’t think people are completely invested yet.”

The money that has gone into the market over the last few weeks has been “short-term” in nature, Mogavero said, which leads her to believe that most people are not convinced that the economy will soon recover.

The market has been ratcheting up and down over the last week. Analysts said they weren’t surprised by its retrenchments, including Friday’s, because no one expected such a weak market to move consistently higher. And many analysts believe that back-and-forth trading is actually a healthy way for stocks to recover, because it reflects a conservative rather than a euphoric attitude among investors.

“I wouldn’t read too much into a down Friday,” said Sam Stovall, chief investment strategist U.S. equity research at Standard & Poor’s Corp. “It’s simply investors taking profits.”

Still, it was too early to tell whether the big March advance might go the way of Wall Street’s year-end rally, which was more than wiped out in January and February.

Although the gains of the last three weeks have been based on early signs of improvement in the banking system and the economy, those advances are vulnerable to crucial economic data due next week and first-quarter earnings reports that begin to come out in a few weeks.

The Dow fell 148.38, or 1.9%, to 7,776.18.

The Standard & Poor’s 500 index fell 16.92, or 2%, to 815.94 and the Nasdaq composite index dropped 41.80, or 2.6%, to 1,545.20.

Despite the decline, the indexes are still looking much better than they did a month ago:

The Dow is up 17.3% in the last three weeks, its best gain since September 1982 and its longest string of advances since May last year. It’s also still up 10% for the month; the last time the Dow gained at least 10% in a month was in October 2002.

The S&P; 500 has soared 20.6% over the last 14 trading days, its best run over that length of time since 1938.

For the week, the Dow is up more than 6.8%, the S&P; 500 is up 6.2% and the Nasdaq is up 6%.

The Dow Jones Wilshire 5,000 index, which reflects nearly all stocks traded in the U.S., ended the week up 6.2%. That’s a paper gain of about $600 billion.

Still, the market has a long way to go before it can be considered to be recovering. The Dow is down 6,388.35, or 45.1%, from its record close of 14,164.53 reached Oct. 9, 2007

The economic reports due next week include the March employment report Friday. Although the report is likely to show more job losses, analysts believe that the market can keep rising if there are other data showing the economy is improving or at the very least stabilizing.

“While the employment report is key, company earnings announcements will shed light on where we go from here because they will tell us how much more restraint companies may need to show in the future,” said Stuart Schweitzer, global markets strategist at JPMorgan Private Bank.