Sudden Stock Rally Leaves Many Investors Guessing

Has the stock market finally hit bottom and begun to recover? Or was Wednesday's rebound a false rally in a bear market--otherwise known on Wall Street as a "dead cat bounce"?

The market's explosive rally late in the day took almost everyone by surprise and happened so fast it was hard for investors to keep up.


Some attributed the recovery to a huge rebound by beaten-down financial stocks, sparked by news of a possible government plan to rescue ailing bond insurersthat could prevent billions more in credit losses. Others credited the aggressive interest-rate cuts by the Federal Reservethat could help stabilize the ecomony and support the beleagured banking sector.

When the dust cleared, the Dow had engineered a 600-point turnaround to end up nearly 300 points, or 2.5%, while the S&P 500 rebounded from a 2% loss to close up over 2%.

Even the Nasdaq rebounded, closing up 1% after being down 4% despite big drops by bellwhethers Apple and Motorola .

The big question now, of course, is whether the rally will continue or simply fall back again as it has all month.

"What you watch here is rallies in bear markets are short, sharp and die in low volume," Art Cashin of UBS said on CNBC after the market closed. "You got very healthy volume today. When the volume starts to dry up, get worried."

"I'm going to look towards tomorrow and Friday also," Peter Costa of Eckhart said. "Because what we want to see is follow-through with volume ... If tomorrow's volume is similiar to today with this kind of move, now we've reached a base and we can start to move upwards."

One thing investors can count on is that volatility, which has become a hallmark of Wall Street's performance in recent months, shows no sign of letting up.

'Volatility is certainly the norm now and not the exception,' said Art Hogan, chief market strategist at Jefferies & Co. 'We have had 14 trading days so far this year and only two of them have been without a triple-digit swing. Three of those days have had 300-point swings.'

The Fed's decision Tuesday to lower its federal funds rate by a wide margin of three quarters of a percentage point, to 3.5 percent, has been met with some skepticism. But it also may have given investors a reason to buy the severely dented stocks in the financial sector.

Rate cuts will eventually boost margins for banks and other lenders, which have been working to lower costs and boost cash levels through layoffs and stock sales.

Moreover, the billions of dollars in mortgage-related losses suffered by the financial companies contributed to months of selling on Wall Street.

The market could be seeing a massive shift, said Steve Goldman, chief market strategist at Weeden.

"The early leaders in a market recovery tend to be banks, REITs (real estate investment trusts) and homebuilders as these are the groups that typically would benefit first from a turnaround," Goldman said. "And those have been the market leaders this week. What has happened is the Fed is flooding the system with liquidity and eventually we should see some traction in the economy. And stocks tend to respond first."