Stocks Follow Rally With Steep Selloff

A bigger cut, he pointed out, would have essentially weakened the U.S. dollar even further against other currencies. And the greenback's decline is what has generated so much interest in gold lately.

Meanwhile, credit-market jitters emerged yet again, with Merrill Lynch(MER Quote) diving 11.1% on news that it has sued Security Capital Assurance (SCA Quote). Merrill is seeking to force the bond insurer to stick to its obligations to guarantee risky debt.

That news overshadowed what was otherwise a positive day for financials. Before the bell, the Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote), lowered the excess capital requirements on both, potentially freeing up as much as $200 billion of liquidity for the mortgage market.

A seize-up in the mortgage arena, particularly subprime, was the genesis last year of the credit crisis that regulators and banks are still trying to tame. Fannie and Freddie shares finished higher by 8.8% and 14.9%, respectively.

"With all this liquidity being thrown at financial institutions, it would not be surprising that, once the liquidity crisis ends, the ones that are left standing will be in pretty good condition," said Sheldon.

As for the immediate term, Sheldon said, "Until the next crisis, we may see calm. I think we're in the wait-and-see mode. People are getting a little more cautious about moving in too quickly, and just kind of trying to see how the economy unfolds."

Elsewhere in financials, shares of Visa (V Quote) soared 28.4% in their highly anticipated debut. The company priced its initial public offering at $44 a share, raising $17.9 billion, and the day's trading lifted it $12.50 to $56.50.

In another boost for the financial space, Morgan Stanley (MS Quote) posted a first-quarter profit of $1.53 billion, or $1.45 a share, after the cost of preferred dividends. That represents a sharp decline from last year, but it topped analysts' forecast for a profit of $1.03 a share. The stock climbed 1.4%.

Morgan's results follow suit with Goldman Sachs (GS Quote) and Lehman Brothers (LEH Quote), who in the prior session helped fuel the market's rally with their own better-than-expected numbers.

The surge only intensified after the Fed slashed 75 basis points off both the fed funds target rate and the discount rate. By the end of the day, the Dow had soared 420 points to 12,393. The S&P 500 rose 54 points at 1331, and the Nasdaq leaped 91 points at 2268.

Among other earnings reports, credit-card company Discover (DFS Quote) suffered a 65% profit drop in the fiscal first-quarter earnings after selling its Britain-based Goldfish unit. Stripping out the sale, Discover made 50 cents a share, a dime more than expected. Still, shares lost 12.6%.

Foodmaker General Mills (GIS Quote) was faring better, adding 1.2% after reporting a 61% jump in fiscal third-quarter earnings to $430.1 million. Excluding investment-related gains, adjusted income comfortably beat analysts' estimate.

And Adobe (ADBE Quote), maker of Acrobat and other software applications, also beat analyst estimates as its bottom line swelled to $219.4 million. Shares spiked 9% to $34.75.

Treasury prices were taking back ground lost in the last session. The 10-year note was up 30/32 in price to yield 3.37%, and the 30-year bond soared 2-03/32 in price, yielding 4.22%.

Overseas markets were mixed. Tokyo's Nikkei 225 climbed 2.5% overnight, and the Hang Seng Index in Hong Kong added 2.3%. In Europe, London's FTSE sank 1.1%, Germany's Xetra Dax shed 0.5%, and the Paris Cac gave up 0.6%.