The Market's Wild Ride

A burst of buying in the final hour capped a dramatic session which saw a 632-point swing in the Dow

by David Bogoslaw

In addition to antacids and sedatives, investors in the current market may wish to keep a neck brace on hand. Witness Wednesday's market, in which a stunning last-hour rally propelled the Dow industrials to a nearly 300-point gain -- after the market benchmark had been down 326 points earlier in the session.

Stocks closed sharply higher Wednesday as investors covered short positions and shopped for bargains. The market's rebound followed five straight sessions of losses.

Transportation, financial and homebuilding stocks were among the best performers. Trading was volatile as investors continued to contemplate how well the economy will fare with the help of the Fed's latest interest rate cuts.

On Wednesday, the Dow Jones industrial average gained 298.98 points, or 2.5%, to finish at 12,270.17, a surge of 632 points from its low on the day. The broader S&P 500 index added 28.10 points, or 2.14%, to trade at 1,338.60. The tech-heavy Nasdaq composite index gained 24.14 points, or 1.05%, to close at 2,316.41.

Earlier weakness in the major indexes had been spurred by sharp drop in tech stocks, spurred by Apple's (AAPL) lukewarm outlook for the second quarter, which heightened worries that the world is headed for a recession. Apple shares fell 11% Wednesday.

The fact that the European Central Bank remains focused on fighting inflation rather than on potential for a sharp economic slowdown isn't encouraging to the markets, though Hong Kong cut interest rates.

The stunning rebound was attributed in part to improving prospects for the beaten-down bond insurance sector on reports that state regulators are scheduled to meet with executives of MBIA Inc. (MBI) and Ambac Financial (ABK to discuss options that could help the companies weather the widening credit crunch. MBIA shares closed 32.6% higher at $16.61 and Ambac shares ended up 71.9% at $13.70.

But growing recognition that the Fed's monetary easing policy is working, as reflected in the jump in refinancing activity, is a more likely reason for the late rally, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

He cited the 8.3% rise in mortgage loan applications during the week ending Jan. 18 reported by the Mortgage Bankers Association on Wednesday. The Refinance Index increased nearly 17% last week and was up 92% since November, a sign that borrowers are responding to the 40-80 basis point drop in rates seen since Nov. 2 across products, the MBA said in its release.

The market's fear was that the Fed could lower the Fed funds rate all it wanted but that other lending rates wouldn't budge, which would have signaled a severe credit freeze, he said.

"Those lending rates are coming down in lockstep with Treasury rates. Now a rate that consumers can borrow at to refinance their homes is starting to move lower," he said. "It would appear that the ice has broken in the credit freeze."

The lower lending rates won't solve the housing valuation problem, since homeowners will need to have equity remaining in their homes to be able to refinance, but "it does go a long way to ease some of the huge pressure that’s been on homeowners in general," he said.

Changes in credit activity tend to run about a year ahead of an anticipated recovery in the housing market itself, he noted. Some of the biggest gainers in equities on Wednesday were homebuilders, home-related retailers like Home Depot (STI), up 6.2%, and Lowe’s Companies (STI), up 6.1%, and real estate developers in Florida and Arizona such as the St. Joe Company (JOE), whose shares rose 10.3%.

There also appeared to be signs that investors are trying to call a bottom in the financial and retail sectors, both of which had impressive gains for the second day in a row.