Hope for credit lifts markets

— -- Stocks posted their third big rally in six trading days, as a glimmer of optimism from the credit markets Monday was apparently enough to calm stock investors.

The interest rate banks charge each other fell by the largest amount in nine months, helping send the Dow Jones industrial average to a 413-point gain to 9265.

In a sign the credit freeze is starting to thaw, the London Interbank Offered Rate for three-month loans in dollars sank to 4.06% from 4.42%. Meanwhile, demand fell for short-term Treasuries, pushing the yield on the one-month T-bill up to 0.60% from 0.13%, as easing worries about credit conditions reduced the appeal of government debt as a haven. After weeks of a virtual credit lockdown, it was exactly what Wall Street needed to see.

"Credit got us in. Credit will start getting us out," says Oliver Wiener, a trader at BTIG.

Federal Reserve Chairman Ben Bernanke also assisted when he told the House Budget Committee that he backs a new stimulus package to help the economy.

"It's important that investors know that the Fed and the federal government are fully committed to working through this economic crisis," says Andy Brooks, head trader at T. Rowe Price.

The market's rally certainly helps mend some pain, as the day's rally restored $500 billion in shareholder wealth, according to the DJ Wilshire 5000 index. The Dow has rallied 9.6% from its panic lows on Oct. 10 and has trimmed its year-to-date loss to 30.2%.

But there's still much ground to make back before investors could consider this to be a meaningful bounce, much less a full recovery. Stocks haven't stitched together two back-to-back gains all month. And the Dow is still below its level a week ago and down 34.6% from its all-time high set Oct. 9, 2007.

The market also has a long way to go before the bear is considered to be dead. The Dow would need to rally an additional 9.5% to hit 10,141, which would be a 20% rise from its low. A 20% rally is considered to unofficially mark the end of a bear market.

Despite the bounce Monday, there are plenty of troubles. Yields on corporate bonds and mortgage debt securities remain elevated, presenting potential problems for corporate earnings and home prices, says Bill Larkin of Cabot Money Management.

So while investors are wise to buy stocks that have been overly punished, they shouldn't expect an easy recovery, says Karl Mills of Jurika Mills & Keifer. Investors are more "confident they've walked the floor of the valley of debt," he says. But, "You still have to deleverage the economy."