Big Rally Leaves Dow Off Just 40 for Week

After all that, we're back where we started.

This week's wild ride on Wall Street literally mimicked a rollercoaster ride: a couple of stomach-turning drops before coasting to the end and dropping you off exactly where you started.

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

Major U.S. Indexes

	Last	Change	% Change	1 Week % Change	YTD % Change
Dow	11388.44	368.75	3.35%	-0.29%	-14.15%
NASDAQ	2273.90	74.80	3.40%	0.56%	-14.27%
S&P 500	1254.96	48.45	4.02%	0.26%	-14.53%
Russell 2000	753.53	29.85	4.13%	4.62%	-1.63%
CBOE VIX	32.00	-1.10	-3.32%	24.71%	42.22%

After being down by nearly 1000 points at Wednesday's close, the Dow Jones Industrial Average clawed back those 1000 points in the following two days — the biggest two-day gain since March 2000 — leaving the blue-chip index off about 34 points from where it ended last Friday! (See the Dow winners and losers.)

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 finished up nearly 370 points for the day, and 140 points of that could be attributed to four financials that are on the short-selling ban list — Citigroup , Bank of America , AIG and JPMorgan . 

Volume was unusually heavy, with about 3 billion shares changing hands on the New York Stock Exchange, compared with the daily average of 1.9 billion. Advancers outnumbered decliners 7 to 1.

Stocks started to pare gains in the final hour of trading amid reluctance among some investors to stick their necks out ahead of the weekend amid all the uncertainty.

"Over the weekend, a lot of things could happen," said Dave Rovelli, managing director of equity trading at Canaccord Adams.

Plus, investors are worried about what will happen on Oct. 2 and they're locking in profits, especially in Morgan Stanley and Goldman Sachs , Rovelli said. Those stocks finished up just 20 percent, instead of the more than 30-percent gain in other financials, including Merrill Lynch   and UBS .

After this week's whirlwind that saw Lehman Brothers collapse and Merrill Lynch get bought by Bank of America, Morgan Stanley and Goldman Sachs 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.

In addition to the short-selling ban, 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.

Former Fed Chairman Alan Greenspan threw his full support behind the Fed, Treasury and SEC for their extraordinary actions to stem the bleeding on Wall Street.

"The only qualification that is critical is that it [the short-selling ban] be temporary, that after the crisis is over we have to unwind the system," Greenspan said. "This is a once-in-a-century event that required an extraordinary reaction."

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 this weekend.

Morgan Stanley 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 Wachovia Bank gained more than 29 percent.

Washington Mutual shares jumped 42 percent after a Wall Street Journal report suggested that Citigroup 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.)

There were more than a few financial companies left off the short-selling-ban list, including American Express , Capital One and CIT Group . In addition, General Electric , which derives nearly half its profit from financial services, is expected to be added to the list. (GE is the parent of CNBC.)

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

AIG , which was bailed out by the government this week, was the biggest drag on the Dow this week, falling 68 percent.

For the week, JPMorgan had the most positive impact on the Dow, climbing 14 percent.

The financial sector was the week's biggest gainer, advancing 7 percent, led by Merrill Lynch, which racked up a 75-percent gain since last Friday.

Oil closed out the week at $104.55 a barrel, after touching $90 a barrel earlier in the week.

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.

Rovelli thinks the short-selling ban will get extended through the election but says we've probably seen the bottom.

"Yeah, I would say at 10600 [in the Dow] that's probably a good bottom," Rovelli said, noting the aggressive selling this week followed by the bounce on heavy volume.

THE WEEK AHEAD:

MONDAY: Fed's Fisher speaks; Earnings from AutoZone, Carmax
TUESDAY: Richmond Fed manuf. report; Earnings from Lennar
WEDNESDAY: Bank Reserve Settlement; Fed's Bernanke and Lacker speak; weekly mortgage applications; existing-home sales; weekly oil inventories; Earnings from Bed, Bath & Beyond and Nike
THURSDAY: Paulson testifies; Chicago, Dallas Fed presidents speak; jobless claims; durable goods; new home sales; natural-gas inventories; Kansas City Fed manuf. report; Earnings from Discover, Rite Aid and Research In Motion
FRIDAY: St. Louis Fed pres. speaks; Last look at Q2 GDP, corporate profits; consumer sentiment; Earnings from KBHome

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