Stocks: Another Wild Mood Swing

Wednesday's big surge came on the heels of a sell-off one day earlier. Strength in Apple and speculation about a rate cut lifted sentiment

by Ben Steverman

Wall Street's mood has shifted once again.

In the words of Morgan Keegan strategist John Wilson, markets went "from depressed to manic" overnight. After all major indexes fell more than 2% on Tuesday, they bounced back strongly Wednesday.

On Wednesday, the Dow Jones Industrial Average was up 247.44 points, or 1.9%, to 13,289.29. The blue-chip benchmark was boosted by strength in Home Depot (HD), Hewlett-Packard (HPQ), and General Motors (GM), all up more than 3%.

The broader S&P 500 index was up 31.04 points, or 2.19%, to 1,463.76. The tech-heavy Nasdaq composite index rose 62.52 points, or 2.5%, to 2,563.16.

Aside from positive news from several companies, including tech names Seagate (STX) and Apple (AAPL), there was little news to explain the market's overnight mood change. Still, the rally was very broad. For every 29 stocks on the New York Stock Exchange rising in price, five fell. On the Nasdaq exchange, the ratio was 23 to 7 positive.

That's a great technical sign that Wednesday was a "follow-through day," a trading session when the overall market, having tested previous lows, shows that past sell-offs went too far. Many technical indicators seem to show the stock market has hit bottom and may be ready for a rebound, says Wilson, the chief technical strategist at Morgan Keegan.

The only worrying sign, he says, was light volume on some indexes, a sign that many investors are on vacation before Labor Day weekend.

The CBoE volatility index, or VIX, widely regarded as a stock-market fear gauge, dropped about 9.5% Wednesday after jumping nearly 16% Tuesday.

Tuesday's sudden stock swoon was a shock to those who thought the equity market was shaking off the effects of this summer's worries about a credit crunch. But negative credit-market headlines Wednesday didn't seem to faze investors. Wall Street appeared to shrug off news from Britain that another hedge fund, Cheyne Capital Management, might be forced to sell assets because of losses. Standard & Poor's cut its ratings on Cheyne's debt.

Rumors that the Federal Reserve may again cut the discount rate may have helped lift sentiment Wednesday. Treasuries fell as investors moved back into equities. Those rumors are a sign that investors are desperate for clues to what the Fed may be planning. All eyes will be on Fed Chairman Ben Bernanke Friday, when he gives a speech on monetary policy and the housing market.

However, Bear Stearns economists say previous Fed moves to add liquidity to the financial markets may already be working. Despite the wild day on Tuesday, markets have begun to stabilize even as traders have lowered their expectations for a rate cut. "We expect that policymakers will be encouraged by signs that the financial markets are settling down," they wrote in a report.

In the energy markets, October West Texas Intermediate crude oil futures surged $1.78 to $73.51 per barrel and September reformulated gasoline soared 8.54 cents to 120.08 cents per gallon as reports issued Wednesday showed inventories fell sharply last week, refinery runs declined to 90.3% from 91.6%, and imports dipped, perhaps because of Hurricane Dean.

Among stocks in the news on Tuesday, headlines from two well-known technology names helped lift the broader market. Shares of Apple leaped 5.7% after the company invited the the press to a "special event" Sept. 5 in San Francisco, presumably to unveil the latest tweaks to its iPod music players. Separately, the company also reportedly announced it will sell television programs in Britain via its iTunes platform. A Goldman analyst reiterated a buy recommendation.

Meanwhile, disk-drive maker Seagate Technology (STX) raised its forecast for first quarter earnings by 22 cents per share. Shares jumped 3.8%.

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