Market's mood swings on financial stocks, oil

The two things that have dragged investors into a bad mood all year, financial stocks and oil prices, put a big smile on their faces Wednesday.

Better-than-expected earnings from West Coast bank Wells Fargo wfc and a 10% boost of its dividend accompanied a big drop in oil prices to clear the way for a 277-point, or 2.5%, rally of the Dow Jones industrial average to 11,239. It was the Dow's biggest gain in 3½ months and a welcome change to the 15.3% drubbing taken all year.

"One day does not tell us much," says Charles Crane of Scotsman Capital. "But it does feel good."

Investors could almost hear a collective sigh of relief from Wall Street as good news, or at least less-negative news, came from:

•The financial world. Imploding values of homes and mortgages and the failure of financial institutions had investors worried the financial system was destabilized. But Wells Fargo boosting its dividend showed not all banks are cash starved, says Dan Genter, president of RNC Genter Capital Management. The Standard & Poor's financial sector index jumped 12.3%, its biggest percentage gain on record since at least 1989, S&P says. Some of the most beaten-up financials rallied: Freddie Mac fre jumped 30% to $6.83; Fannie Mae fnm gained 31% to $9.25; and Lehman Bros. leh rose 26% to $16.65.

"Not all financials are in dire straits as everyone thought," he says.

•The oil patch. The price of a barrel of oil slid $4.14 to $134.60, topping off a $10.58-a-barrel decline in the price of crude over the past two days.

Genter says oil falling is a critical catalyst for stocks because investors have assumed prices would be elevated for a long time. "What you're seeing is a relief rally of oil coming down," he says.

•Almost everywhere else. Many industries, excluding those related to energy and gold, joined in the rally. In addition to financials, shares of auto companies added 17.6%; home builders, 17.0%, and building products, 11.5%. Such wide participation pushed the Standard & Poor's 500 up 30.45 points, or 2.5%, to 1245.36.

Tech stocks were also strong, with the Nasdaq composite rising 69.14 points, or 3.1%, to 2284.85.

All the positive signs have some investors thinking the bottom has been put in. "It's a great time to own U.S. (stocks). The best since September 2002," says Simon Baker of Baker Avenue Asset Management, referring to just before the last bear market ended and a five-year bull run began.

Despite all the convincing signs a bottom may be near, though, there are still doubters. "For this to have legs … you need several days of sustained direction," says Richard Cripps of Stifel Nicolaus. There is plenty that could extend or end Wednesday's reversal, including earnings releases today from Wall Street powerhouses JPMorgan Chase jpm and Merrill Lynch.mer

While the rally is welcome, the Dow is still down 21% from its record high last year. Fannie Mae and Freddie Mac are 87% and 90%, respectively, off their 52-week highs. "We had a great day. I have my fingers crossed it can continue," Crane says.