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Dow Soars as Financials Jump Over 20%

Published: Friday, 19 Sep 2008 | 2:48 PM ET

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By: Cindy Perman
CNBC.com

This week's wild ride on Wall Street is starting to look like just that — a ride — because the Dow is on track to end roughly where it was last Friday.

So, essentially, you could've taken the week off, and it wouldn't have made a difference.

Major U.S. Indexes

.DJIA

.NCOMP

.SPX

After being down by nearly 1000 points at one point this week, the rally of the past two days has put the Dow Jones Industrial Average within about 50 points of where it ended last Friday.

Thursday was Wall Street's best day in six years. Veteran trader Art Cashin, floor director of UBS, said he thinks it was "the most credible rally we’ve seen this year." It "had that stampede effect that I’ve been looking for," Cashin told CNBC.

But today was a different story. Some called it a fake rally due to the SEC's temporary ban on short-selling of 799 financial stocks, effective today, to help protect any future victims of short sellers, who have been criticized in the demise of Bear Stearns, Lehman Brothers and AIG. Short selling occurs when traders borrow a stock, betting it will go down, only to buy it at a lower price. (See a full list of the 799 companies.)

Cashin said today's rally was probably exaggerated by 30 to 50 percent due to that ban.

The Dow was up anywhere between 300 to 400 points today, and roughly 150 points of that could be attributed four financials that are on the short-selling ban list — Citigroup, Bank of America, AIG and JPMorgan. (Track the Dow 30.)

FOR INVESTORS

The SEC temporarily banned short-selling of 799 financial stocks, effective today, to help boost investor confidence and protect any future victims of short sellers, who have been criticized in the demise of Bear Stearns, Lehman Brothers and AIG. This follows a similar move in the U.K. a day earlier. (See a full list of the 799 companies.)

Meanwhile, Treasury Secretary Hank Paulson announced a $50 billion plan to help remove toxic mortgage assets from the books of financial firms and restore confidence in the financial system. Part two of that plan would be to ramp up the government's rescue of Fannie Mae and Freddie Mac more quickly, without Congress's approval.

And the Federal Reserve is taking steps to stabilize money-market funds whose asset values have fallen below $1 by extending loans to banks to buy those assets.

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Poll: Ban on Short Sales a Good Idea?

"This is a gigantic step forward, the only way to fix the crisis," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "Economy still a mess, but systemic risk way down," he said.

There was chatter about more Wall Street-Main Street pairings this week but the government's moves take pressure off of these firms to do a deal immediately.

Morgan Stanley [MS Loading... () ] said the government plan is a potential "game-changer" that puts them in a better bargaining position. The company, which had been in advanced merger talks with Wachovia Bank, is continuing to pursue its options, giving priority to remaining independent. Still, shares of Morgan Stanley and Wachovia Bank [WB Loading... () ] were up about 25 percent.

After this week's whirlwind that saw Lehman Brothers collapse and Merrill Lynch get bought by Bank of America, Morgan Stanley and Goldman Sachs [GS Loading... () ] are the last of the large, independent, U.S.-based investment banks. Both stocks were pummeled earlier this week amid concerns about the investment-bank model.

Washington Mutual shares [WM Loading... () ] jumped after a Wall Street Journal report suggested that Citigroup [C Loading... () ] was considering making a bid for the bank, the largest U.S. savings and loan.

(This stock picker cuts through the panic and the hoopla and says he's buying bank stocks. Click on the video at left.)

Insurers' woes continue, with Moody's saying it may downgrade ratings on bond insurers Ambac [ABK Loading... () ] and MBIA [MBI Loading... () ] by more than one notch because of increasing losses from subprime mortgage debt.

If you're feeling a little bummed that you didn't take this week off, great news! You've got another chance. Some investment pros say don't rush back into stocks. Wait until Oct. 2, when the short-selling ban expires.

"My recommendation to someone who wants to get into this market is you're going to have plenty of time between Oct. 2 [when the curbs expire] and Nov. 5 [the presidential election]," said Michael Cohn, of Atlantis Asset Management.

"After the election there could be a nice rally," he said.

In the meantime, enjoy it as a spectator sport.

"Watch the bank-lending rate -- that’s where the whole game’s played out in the next week," Cashin said.