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Yesterday, the

Dow Jones Industrial Average

leapt nearly 400 points and the


had its third-best percentage gain ever, surging 8.9%.

Ned Riley
State Street Global Advisors

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The question -- worth a lot more that $64,000 right now -- on everyone's lips is: Is this rally just a blip? For today's Daily Interview,

turned to Ned Riley, chief investment strategist at

State Street Global Advisors

, to ask him if the rally might be a cause for celebration or caution.

TSC: Some traders say Dell's (DELL) announcement it will meet estimates fueled the charge, others say Lehman's upgrade on Yahoo! (YHOO) led the rally. What paced the charge, and is this rational?


Everybody's saying that Michael Dell turned the market. I don't care if it's Michael or the farmer in the dell. Whoever did it was wonderful.

Dell was just one small piece of information that would lead people to believe that the technology cycle has ceased to be a big issue. In other words, the bleeding might have stopped a bit in terms of inventory disgorging and inventory liquidation. Clearly, half of the problems in the tech area have been an overestimation of demand and a bloating of inventory.

TSC: So, then, if Dell was only a small factor, what drove the Dow up nearly 400 points and the Nasdaq 150?


All of the elements were there for a rally. There was no question.

First, I think psychologically we were ready for a rally. Clearly, the continued erosion in the Nasdaq had been weighing heavily on the psyches of investors. In particular, the newer and inexperienced investors were experiencing incredible anxiety and despair as prices continued to fall and, ironically, continue to fall in light of declining interest rate and lessening inflation concerns.

Even Wall Street analysts had become so shell shocked, particularly in the past two to three weeks of warnings that they themselves became fearful to make any forecasts beyond this quarter or the next. We are in a future shock at warp speed.

From an emotional perspective we were ready for it. In my experience, when expectations reach such a low level, it can actually be a good sign for at least an interim bottom in the market.

Second, there were several individual pieces of information that led it. The put-to-call ratio was at an exceptionally high level, and with the number of pre-warnings, clearly the fundamental backdrop wasn't being painted as a nirvana state, either. So, I think we reached a period of overreaction where estimates and expectations were cut too dramatically, and the long-term growth was clearly underestimated.

Third, the valuation of some of these companies has actually achieved a level that renders them attractive. But valuation doesn't make markets rally. Change in emotion does. For one day, at least, we've had this change in emotion.

TSC: What about the coming onslaught of earnings warnings and shortfalls expected in the next few weeks?


A lot of investors may believe that if their companies had passed through the preannouncement period without warning, then, maybe the estimates that are now in place are actually close to the mark and we won't see any further warnings come out.

We haven't seen any further midquarter commentary that some of these companies have been giving, so I really believe that some investors felt that the worst news has taken place. Even though we'll get the actual warnings in the next two to three weeks, and that the commentary may be one of uncertainty, maybe there isn't any further deterioration in the environment but stabilization at a very low level.

TSC: Besides Dell and Yahoo!, what stocks and sectors led the rally?


It was interesting to see the leadership.





, Dell. Clearly, the survivors in their respective groups. They are the leaders of the pack in each of their respective fields.

TSC: Could this be the beginning of a long-term recovery in the market?


If we look year over year, we've got some pretty sad numbers to contend with. Even at the end of January the Nasdaq was flirting with 2800. We are still 1,000 points below that. And at the beginning of March, the Dow was over 10800. And we are 1,000 less in the Dow today.

The decline in the markets over the last year has reduced the wealth factor by $4 trillion, and that is about two-and-a-half times what President Bush has proposed in his tax cut. As much as I'd love to see the Nasdaq back up at 5000 or the Dow at 12000 or 13000, it's going to take time.

Yesterday's rally was terrific, but to sustain a rally we are going to need a number of ingredients. A stronger inclination by the Federal Reserve to lower interest rates at least another 150 basis points. The Fed is looking at economic data, rather than the market data. This is a profits recession, rather than a traditional economic recession. The Fed is still looking at it from the traditional perspective that housing hasn't deteriorated much, consumer confidence looks pretty good, and so far the employment rate has stayed pretty strong.

The Fed needs to be very aggressive.