Today was the day that stocks staged a massive turnaround. Sentiment had gotten extremely negative and a little good news gave buyers some reasons to look for bargains. It also gave short sellers a good reason to take some profits on some major gains from the last few weeks.
What was the catalyst? It was the Federal Reserve announcing that it would pump $200 billion worth of liquidity into the financial system to shore up banks that have been hit the hardest by the mortgage meltdown. More than anything else this is more evidence of a Federal Reserve that is trying every option available to it to restore confidence in the system and bring things back to normal. The Fed has 
seen that up to this point the interest rate cuts have proved to be not nearly enough and this is a real sign that it is going outside the normal plans. This plan basically allows banks to switch its debt from less liquid bonds and those that have been hurt badly by the recent market deterioration, into more liquid and safe bonds.
The stock market responded with a standing oviation to this new plan. The Dow rose by 417 points. The Nasdaq gained 86 points. The broad based S&P 500 gained 47 points, or about 3.7%.
The biggest beneficiary was the financial sector. The financial shares inside the S&P 500 gained a stunning 7.4%, rebounding from its multi-year lows hit yesterday. Also gaining nicely today were the basic material sector (up 4.29%), and the financial sector (up 4.8%).
All of this is great news for bulls since they haven't had a thing to cheer about in weeks, but the real question is, what comes next? Is this the sign of a sea change in investor attitude or simply a one day buying spree? I'm afraid I am much more inclined to believe it is the latter. In fact many of the markets biggest percentage gains tend to occur during bear market periods. In the 2000 and 2001 bear market the Nasdaq had many of its largest one day rallies only to see them unravel within days. At this point I would be far more impressed to see numerous days in a row of small gains than one massive up day.
The fact is that the employment picture is getting worse by the day, consumer confidence is plunging, and commodities continue to put significant inflation pressures on our economy. Today's move by the Fed is helpful, but it will take far more than one brave Fed move to right the ship for this economy.
Comment Preview