NEW YORK -- Investors rushed giddily back into stocks after the government launched its shock-and-awe campaign aimed at staving off financial Armageddon. This week could show if the euphoria was warranted.
Many on Wall Street say Washington's proposed new plan to buy $700 billion in toxic and hard-to-sell mortgage assets from banks could be a major game-changer — perhaps big enough to unfreeze credit markets and end the stock market's funk.
The Dow Jones industrials' 800-point rally Thursday and Friday was its biggest two-day gain in almost nine years, after tumbling nearly 1,000 points the prior three sessions amid fears of a financial meltdown.
Skeptics warn that the rally was artificial and unsustainable given the government's massive influence, and stress that challenges still face the economy and housing.
The rescue plan is being credited with transforming the mood on Wall Street from fear to hope. There's optimism that investors can stop worrying about a meltdown and refocus on basics, such as corporate earnings.
"People were starting to visualize a world in which the lights go out," says Donald Luskin, chief investment officer at TrendMacro. "The lights of the world are not going out."
The reversal had many of the earmarks of a stock market bottom, says Mark Arbeter, technical strategist at Standard & Poor's. Stock prices fell off a cliff. Fear was at levels not seen since the end of the last bear market in October 2002. On three straight days a third of the stocks on the New York Stock Exchange hit 52-week lows, the first time that has happened in almost 35 years.
"We think evidence of a climax bottom last week were overwhelming," Arbeter told clients.
What sparked the big gains, however, is troubling, says Rich Suttmeier, chief market strategist at ValueEngine. "The rally was fueled by artificial factors," he says. The biggest gains were in the financial sector, which shot up nearly 11% Friday.
The bulk of the gains, he says, were fueled by the impact of the Securities and Exchange Commission's temporary ban on a practice called short selling on nearly 800 financial stocks. In a short sale, investors sell borrowed shares with the hope of buying them back at a lower price.
Short sellers, who profit when stocks fall, have been blamed for the sharp fall in bank stocks, such as Lehman Bros. The temporary ban ends Oct. 2.