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Stocks Recoup Partial Losses in Broad-Based Rally

[The text highlighted in red below is the most consequential, IMO.]

http://online.wsj.com/article/SB10001424053111904007304576497671820563698.html

›AUGUST 9, 2011, 4:37 P.M. ET
By STEVEN RUSSOLILLO

NEW YORK—U.S. stocks soared in turbulent trading Tuesday, coming off the worst three-day selloff since the financial crisis, as investors took in stride the Federal Reserve's pledge to keep interest rates near zero at least through mid-2013.

The Dow Jones Industrial Average finished near session highs, up 429.92 points, or 3.98%, to 11239.77. The index, which gained as much as 243 points at its morning high, saw its rally fade ahead of the Fed decision and then turned negative after the statement was released. It fell as much as 206 points before it turned positive again and marched sharply higher in the final trading hour.

The volatile trading came as the Fed signaled it will keep its benchmark short-term interest rate close to zero for at least another two years. The central bank also sharply downgraded its view of the U.S. economy.

In a statement after a one-day policy meeting, Fed officials said they expect the weak economy to warrant exceptionally low levels for the federal funds rate "at least through mid-2013." Seven voted in favor of this action, with three voting against. Fed officials also downgraded their assessment of the U.S. economy for the third time this year, saying that economic growth so far this year has been "considerably slower than … expected."

"We're still in a place of extreme fear and emotional trading," said Ron Florance, managing director of investing strategy and asset allocation for Wells Fargo Private Bank. "We're not even close to where fundamentals and valuations are driving market performance."

The Dow's sharp gains came after it fell 635 points on Monday, the sixth-biggest point drop in its history. Jittery investors have fretted in the wake of Standard & Poor's downgrade of the U.S. government's credit rating and the possibility that the economy could slide into another recession.

The Standard & Poor's 500-stock index rose 53.07 points, or 4.74%, to 1172.53, led higher by the financials and material sectors. The S&P 500's financial sector, which was hit the hardest in Monday's drubbing, finished up 8.2%.

The technology-oriented Nasdaq Composite gained 124.83 points, or 5.29%, to 2482.52.

"It's normal to have a bounceback after the downward moves we've had," said John Carey, portfolio manager at Pioneer Investments. "The key is whether this is a sustained recovery or just a sign of bargain hunters coming in and picking up beaten-down stocks."

Investors were looking for clues pertaining to any options the Fed may have to boost the economy and combat the market's recent slide. While the Fed didn't announce a bold step of buying more bonds that some in the markets were hoping for, the move to keep the benchmark short-term interest rate near zero may help keep borrowing rates low and drive investors into riskier assets, like stocks [no kidding].

"We're still so painfully oversold from the previous few sessions," said Keith Bliss, senior vice president at Cuttone & Co., a brokerage on the New York Stock Exchange floor. "But the downdraft following the Fed statement shows you how temperamental the market is. There's a lot of emotion in the market. when there's emotion, you'll get a lot of big intraday swings."

Gold futures reflected continued extreme investor anxiety. The most-actively traded contract, for December delivery, settled $29.80, or 1.7%, higher at a record $1,743.00 a troy ounce on the Comex division of the New York Mercantile Exchange.

Crude-oil futures settled below $80 a barrel for the first time in nearly 10 months. The U.S. dollar lost ground against both the euro and the yen.

"Yesterday was a fear-and-panic and hysteria-driven trade. Today we're seeing that unwind a little bit. But there's a lot of nervous energy in the air. The word recession is being thrown around and it's making people anxious," said Joseph Tanious, market strategist at J.P. Morgan Asset Management, referring to Monday's slide and Tuesday's rebound.‹