Stocks Romp in Greener Pasture

A solid midday recovery morphed into a blockbuster rally Wednesday, proving yet again that there's more fear of missing out on the next advance than of further losses.

After trading as low as 7532.66 early on, the Dow Jones Industrial Average reversed course and rose steadily for the rest of the session, closing up 6.4% to 8191.29. The 488.95-point gain was the second-largest in the Dow's history. The percentage rise was not similarly historic but was the Dow's biggest since October 1987.

The S&P 500 jumped 5.7% to 843.42 vs. its earlier low of 775.75, while the Nasdaq Composite gained 5% to 1290.23 after trading as low as 1192.42.

Market internals reflected the day's drama. In Big Board trading, up volume totaled 81% of the 2.75 billion shares exchanged -- a new one-day record and a record fourth-consecutive session of more than 2 billion shares. Advancing stocks bested decliners 19 to 13, while new 52-week lows overwhelmed new highs 899 to 9. Up volume was 75% of the 2.2 billion total in over-the-counter trading, where new lows led new highs 551 to 6 and breadth favored advancing stocks 4 to 3.

Myriad catalysts were cited for the advance, including:

J.P. Morgan Chase's (JPM) reassurances about its liquidity, which rating agency Standard & Poor's echoed. J.P. Morgan rose 16% and other recently battered financials such as Citigroup (LEH) rallied in concert; the Philadelphia Stock Exchange/KBW Bank Index rose 6.5%.

Merck's (MRK) $10 billion buyback announcement (and increased dividend), which, to some, recalled IBM's (IBM) buyback on Oct. 28, 1997 -- at the bottom of that cycle's downturn.

Rumors of a pending buyback announcement (or dividend) by Microsoft (MSFT), which rallied 7.5% to $46.23, snapping a string of miserable losses.

A growing sense that stocks had reached attractive levels relative to Treasuries. Earlier Wednesday, the two-year note traded with an all-time low yield near 2% while the 10-year note's yield slid to an eight-month low of 4.36%. Treasuries later reversed course as equities rallied.

The arrests of three members of the Rigas family, which once controlled Adelphia Communications. To a lesser extent, expectations for Congressional passage of a corporate fraud bill further encouraged investors that action is being taken.

Short covering.

Spikes in fear indicators such as the one-day Arms Index, which traded over 4.0 intraday before settling at 0.33 and the CBOE Market Volatility Index, which Tuesday closed above 50 for the first time since 1987. Wednesday, the VIX traded as high as 56.74 before closing down 10.3% to 45.29.

The Dow Shall Rise Again The index's biggest one-day rise since 1987

On the more anecdotal front, there was Tuesday's short-selling suggestion by CNBC's Maria Bartiromo as well as The Wall Street Journal's recent story about increased short-selling by individuals. Short-selling data and mutual fund outflows suggest extreme levels of bearishness among retail investors, historically not the best market timers.

Additionally, Wednesday brought some towel-throwing by some previously staunch bulls, which had been missing until now. Tobias Levkovich, U.S. equity strategist at Salomon Smith Barney issued a report Wednesday entitled "A Wounded Bull Pulls In His Horns."

Levkovich, who'd turned bullish in February and was sticking to his guns in late June, Wednesday cut year-end targets on the Dow to 9650 from 11,200 and on the S&P to 1000 from a range of 1200 to 1250. "The key problem is not having a clear benchmark for valuation purposes," he wrote, referring to investors' disbelief in corporation's reported earnings and his own belief in the shortcomings of the S&P's so-called core earnings. (Basically, since S&P's core earnings is a new metric, there's no historical record to compare the current results to.)

Separately, Don Hays of Hays Advisory Group admitted (finally) his "new bull market" thesis had burst after all major averages careened through their Sept. 21 lows. An "embarrassed and humble[d]" Hays was "reluctantly selling some stocks" Wednesday, despite "super-strong evidence that a major bottom will be made in the next few days." (Uh-oh.)

Weird Al and the Gang

Of course, none of the aforementioned reasons (nor ones I've missed) will be enough to convinced some readers the gains weren't the result of market manipulation by the Fed or other government agencies.

As I suspected, last night's story did little to disabuse some readers from the notion the market has become a government-sponsored entity. If the Fed isn't directly buying equity futures, it could "encourage" member banks or big broker/dealers to do it on their behalf, many suggested. Then there's the President's Working Group on Financial Markets, better known as the "Plunge Protection Team."

It's unclear whether any government operatives were active in the financial markets Wednesday. But conspiracy theories aren't really necessary to explain the action. Stocks have been battered and, as reported here ad nauseam, there's been a never-ending string of folks trying to call a bottom; i.e., hordes of participants anxious to put money to work on a belief the selling was irrational and didn't reflect the perceived strong fundamentals of economic recovery and low inflation/interest rates.

Rather than the "why," the real question is the "what," as in, what comes next?

No doubt Wednesday's action will really encourage the optimists that a tradeable bottom (at least) has (finally) arrived. Bears, of course, will note that the Nasdaq's 10 largest point gains and nine of its 10 biggest percentage gains (Wednesday didn't quality in either category) have occurred since its March 2000 peak. That is, big up days like Wednesday's have inevitably led to disappointment.

If the market were really going to toy with people's emotions (as it is wont to do) what will happen is Wednesday's rally will be built upon for a measurable degree of time and price, defying the naysayers. Then, just as folks start getting comfortable again, the bear will re-emerge more ferocious than ever.

But let's see if step one (additional rallying) occurs, first.

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