Investors are optimistic that bailouts will work

NEW YORK -- Wall Street is hoping that the latest government intervention to fix banks and stimulate the economy will do what earlier rescue attempts could not: pave the way for a lasting stock market recovery.

This could be the most pivotal week of the year for investors. Treasury Secretary Timothy Geithner is slated Tuesday to roll out the Obama administration's revamped plan to rehabilitate the nation's ailing banking system.

Investors will also be closely eyeing an expected Senate vote on a massive stimulus plan designed to boost the economy and create jobs.

Stocks began rallying last week amid hopes that the roughly $800 billion stimulus bill would get passed and that the bank plan will have the ingredients needed to restore confidence to the financial system, get credit flowing again and provide help to homeowners facing foreclosure.

The big question is whether the 5.2% gain last week for the Standard & Poor's 500-stock index is the start of a full-fledged stock rebound or just another failed rally built simply on hope.

"Everyone is wondering whether the new government response is 'the' response that will be the tipping point that signals a market bottom," says Bill Stone, chief investment strategist at PNC Wealth Management.

Uncertainty as to how stocks will react to the news coming out of Washington remains, given that every other "rescue rally" has quickly faded.

The four major rallies since March 2008 — when the government orchestrated the JPMorgan Chase rescue of Bear Stearns — have all been brief and have been followed by fresh bear market lows for stocks soon after, Strategas Research Partners says.

"You always want to look at precedent," says Gary Kaltbaum, president of Kaltbaum & Associates. "Every time we have had a bailout of the financial firms … the market gets a pop. Every time it has failed" after the economy and banking system failed to improve.

But there are signs that this rally can gain traction. Kaltbaum notes that the market has been able to stay above its November lows despite a barrage of bad news.