Bear's Bailout Spooks Stock Market

Fears that the investment bank's liquidity crisis could spread caused indexes to tumble Friday. Next week's focus: The Fed's policy meeting on Tuesday

U.S. stock indexes suffered heavy losses Friday amid fears that seized-up liquidity at Bear Stearns (BSC) could signal similar problems at other big financial firms. Bear's stock was plunging Friday as JPMorgan (JPM) and the Federal Reserve launched a rescue operation to help restore liquidity to the troubled financial firm.

Bear -- the subject of day after day of market rumors that it faces a cash shortage -- secured a 28-day loan from JPMorgan Chase, and the Wall Street investment banks are negotiating permanent financing. The move comes amid market rumors that Bear will be taken over by another firm.

Bonds soared in a flight to safety amid speculation the Fed will have to cut rates up to 100 basis points at its policy meeting on Tuesday. The dollar was lower as the prospect of deep rate cuts trumped rumors that central banks would intervene in currency markets to prop up the greenback. Gold reached above $1,000 before dropping just below that psychologically significant level.

Traders ignored reports that the consumer price index was unchanged in February, and that the closely watched University of Michigan Consumer Sentiment index fell to 70.5 in March from 70.8 in February.

In a volatile session capped by a late burst of short-covering, the Dow Jones industrial average tumbled 194.65 points, or 1.60%, to end the session at 11,951.09. The broader S&P 500 index dropped 27.34 points, or 2.08%, to finish at 1,288.14. The tech-heavy Nasdaq composite index declined 51.12 points, or 2.26%, to close at 2,212.49.

Market activity was overwhelmingly negative amid active trading. On the New York Stock Exchange, 26 issues fell in price for each 5 that advanced. The ratio on the Nasdaq was 22-6 negative.

"We are clearly in a news-driven environment and believe strongly that the horrendous news flow will continue,” says S&P chief technical strategist Mark Arbeter. “However, we also believe that the worst of the market decline is behind us based on the technical conditions that have presented themselves over the last month or so."

Apart from any further developments on the Bear Stearns front, the Fed meeting on Tuesday will be next week’s most carefully watched event in the market. The Fed meets Mar. 18 and is expected to cut the federal funds rate either a half or three-quarters of a point.

The week will also provide key updates on housing, including new numbers on February housing starts and a check of builders’ sentiment in early March.

Monday’s report on February industrial production should provide a glimpse of how the factory sector is holding up. Analysts will be paying close attention to output of business equipment to judge the strength of capital spending.

Also, two regional reports from the New York and Philadelphia Fed districts will offer the first glimpse at March business activity.

Rounding out the week’s news will be reports on the current account deficit and international capital flows for January, along with February data on producer prices and the index of leading indicators. The markets will also be watching weekly initial unemployment claims very closely to judge the extent of any further weakness in the job markets.

U.S. markets and government offices will be closed on Good Friday, Mar. 21.

On Friday, the investment banking and brokerage group took a big hit on the Bear news, with the S&P industry index falling 7.1%. Lehman Brothers (LEH), Merrill Lynch (MER) and Goldman Sachs (GS) were among the industry names suffering losses.

Bear shares initially rose over 10% on the news of the bailout, and then plunged 45% as the Street took a deeper look at the implications. Bear's stock had fallen almost 29% in the five previous sessions.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,"