Bear markets often see biggest 1-day gains

NEW YORK -- A day after posting gargantuan gains, Wall Street on Wednesday was hoping for an encore, another big up day, a sign that all is well again with the ailing stock market.

Instead, the Dow Jones industrials gave up sizable early gains, faded into the close and finished down 47 points to 12,110. The losing session dampened some optimism generated by Tuesday's 417-point Dow rally.

The market's relapse — namely, its inability to follow through on its biggest one-day gain in five years — raised fears that Tuesday's mega-rally was little more than a short-lived bounce, a head fake, or what professional investors refer to as a "bear-market rally."

"Don't be fooled by Tuesday's rally," says Michael Shulman, editor of ChangeWave Shorts, an investment newsletter. He says the health of the economy, banking sector and housing market remain poor and that stocks won't turn up for good until those problems are solved.

In fact, the biggest daily point gains in stock market history have come in bear markets, or periods when stocks were in confirmed down trends.

Ten of the largest point increases for the Nasdaq composite, for example, occurred in the 2000-2002 bear market. Four of the top five all-time point gains for the Dow also came in the last bear market.

A bear market rally is a temporary rise in stock prices in a longer-term down market. These sharp rallies do not signal a change in the primary market trend.

So no one knows for sure whether Tuesday's rally marked a market bottom or whether more pain is ahead.

Still, Gary Kaltbaum, president of money management firm Kaltbaum & Associates, notes that stocks have rallied sharply at other times this year on good news from the Fed, such as rate cuts or cash infusions to battered banks, only to give up their gains and sink to fresh lows. The market's inability to add to Tuesday's big gains is worrisome.

"This market action is similar to the 2000 bear market," he says. "We get big rallies, but the market ends up going lower. That's why investors have to cast a suspicious eye on these one-day rallies." His point: There's no proof yet that stocks have bottomed out.

Investors, it appears, are not convinced that the Federal Reserve's latest plan to minimize fallout from the credit crunch, which was greeted positively when it was announced Tuesday, will cure all the nation's economic ills. What's more, two longtime headwinds continue to worsen. On Wednesday, oil topped $110 a barrel for the first time, and the U.S. dollar continued its historic descent vs. the euro, fanning inflation fears.

"Things are still pretty grim," says Todd Clark, a trader at Nollenberger Capital Partners.