Stocks rally 11% on bargain hunting

NEW YORK -- U.S. stocks soared almost 11% Wednesday as investors shrugged off the worst reading ever on consumer confidence and snapped up beaten-down shares amid hopes that central banks around the world will lower borrowing rates further.

The Dow Jones industrial average enjoyed its second-biggest point gain and sixth-biggest percentage gain ever, rallying 889.35 points, or 10.9%, to close at 9,065.12.

Broader stock indexes also rose sharply. The Standard & Poor's 500 index gained 91.59 points, or 10.8%, to 940.51. And the technology-stock dominated Nasdaq composite jumped 143.57 points, or 9.5%, to 1649.47.

Despite the big moves, Wall Street pros treated the rally with caution and skepticism because the stock market has yet to post two up days in a row this month and has been unable to hold the gains of other big rallies in recent weeks.

On Oct. 13, the Dow skyrocketed to a record gain of 936.42 points, or 11.1%, but gave back all of the gains and more in the 10 sessions that followed.

That lack of follow-through and a still-weak economy has many Wall Street pros wondering if this is simply a big rally in an ongoing tough environment.

"This is another one-day wonder," says Chris Orndorff, a portfolio manager at Payden & Rygel. "The economy is still in bad shape, the credit markets are still frozen, and while stocks may be cheap, earnings are heading lower not higher."

Orndorff stresses that there are always big rallies in bear markets.

"We saw 20% rallies in both 2001 and 2002, yet both were miserable years for stocks," says Orndorff. "This is just a bear market rally. While the actions of policymakers have provided a light at the end of the tunnel, the end of the tunnel is still a long way away."

The Dow remains 36.0% off its record high, while the S&P 500 down 39.9% from its peak. The Nasdaq is off 42.3% from its 2007 high but far off its all-time high set during the dot-com doom..

On a more positive note, the major U.S. stock indexes continued to show resilience by closing far above their intra-day panic lows hit on Oct. 10. The Dow, for example, is now 1,183 points higher than the trough of 7882.51 hit on Oct. 10. Similarly, the S&P 500 is now 101 points, or 12% above its intra-day low.

Still, the rally was massive, creating a single-day paper gain of $1 trillion for stocks, according to the Dow Jones Wilshire 5000 "wealth measure." However, for the year the market has lost $6.6 trillion in value.

Todd Clark, a trader at Nollenberger Capital Partners, says the market's ability to move higher despite the lowest reading on consumer confidence since 1967, and a 17.7% drop in home prices in 20 major cities tracked by the Standard & Poor's/Schiller index, is a good sign.

"What's different is it was the first time the market rallied on pretty negative news," he says.

What traders really want to see is for the rally to continue, adds Todd Leone, a trader at Cowen & Co.

"Tomorrow is an important day," Leone says. "I'd love to see us up or at least hold the rally."

The big event Wednesday for stock investors is the Federal Reserve meeting and decision on interest rates. Investors expect the Fed to lower short-term interest rates by half a percentage point to 1% from 1.5%.

Another reason why stocks are finding buyers is that shares are trading at less expensive prices relative to their earnings. Currently, the S&P 500 is trading at less than 10 times their projected earnings for 2009. That is getting close to the valuation level of 7 times earnings at the bottom on the 1973-74 bear market.

However, many investors think the profit expectations for next year are still too high and must come down to reflect an expected weak economy.

In corporate news, Boeing helped lift the Dow after the aircraft maker and its biggest union agreed to a tentative deal to end a strike and stop revenue losses estimated at $100 million a day. Whirlpool said it will cut about 5,000 jobs by the end of 2009.

Investors worldwide snapped up stocks after posting huge declines Monday on economic worries. Japan's Nikkei stock average jumped 6.41% and Hong Kong's Hang Seng index surged 14.4% — its biggest gain in 11 years — a day after plunging more than 12%. Britain's FTSE 100 rose 1.92%, Germany's DAX index jumped 11.28%, and France's CAC-40 rose 1.55%.