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Wall St. bounces back from brink

Traders now anxiously wait to see if this rally can be sustained
Traders now anxiously wait to see if this rally can be sustained  

By Alexandra Twin
CNN/Money Staff Writer

NEW YORK (CNN/Money) -- The Dow Jones industrial average saw its second-biggest one-day point gain ever as stocks snapped back from weeks of sharp selling.

The buying was spurred by reassurance from J.P. Morgan Chase about its Enron ties, the arrest of some of the key offenders in the Adelphia scandal, and continued good cheer about 3M's quarterly results.

Investors also shrugged off a gloomy lead from European and Asian markets, some of which fell by as much as 5 percent after earlier resisting the negative pull from Wall St.

The spate of good news in the U.S. seemed to distract investors from the crisis of confidence that has pressured markets for months, and particularly in the last few weeks.

According to preliminary reports, the key Dow Jones index added 488.95 points to 8,191.29; it was the second-biggest one-day point gain for the Dow, following a gain of 499.19 points on March 16, 2000 in the midst of the bull market.

The Dow had been down nearly 170 points earlier in the session and has declined in each of the last nine weeks.

The Nasdaq composite index gained 60.96 to 1,290.01. The Standard & Poor's 500 index added 45.70 to close at 843.40.

"The market has been oversold with all the fear. So partly, you're seeing a response to that," said Robert Philips, chief investment officer at Walnut Asset Management.

"J.P. Morgan's comments this morning were also a good first step toward recovering credibility, you had the Senate and the House agreeing on their fraud policy, and you had the Adelphia executives dragged out in handcuffs.

"All these things are coming to fruition and the markets are trying to stabilize."

Worries about financial services companies have exacerbated the stock selling in the last few sessions. Citigroup (C: up $2.59 to $29.59) and J.P. Morgan Chase have come under intense scrutiny for their involvement in the Enron debacle.

On Tuesday, the companies were accused at a Senate hearing of helping the bankrupt energy trader manipulate its financial statements.

Many factors

Asian markets finally succumbed to the Wall St woes
Asian markets finally succumbed to the Wall St woes  

But in a conference call Wednesday, J.P. Morgan defended itself against these charges, saying that it has a high degree of confidence in its accounting and will have no problem signing off on its books by the Aug. 14 deadline.

The news seemed to help check the losing streak suffered by the blue chips, at least for one day, as did continued strength in diversified manufacturer 3M (MMM: up $7.96 to $119.72), which Monday posted a higher second-quarter profit that beat estimates and said it expects to top second-half forecasts.

In addition, the founder and former chairman and CEO of Adelphia Communications, two of his sons and two other former executives were arrested Wednesday on federal fraud charges.

The group also faces charges by the Securities and Exchange Commission surrounding its role in the downfall of the No. 6 cable television operator, which filed for bankruptcy protection last month.

Traders also pointed to broad short-covering, namely, the process in which investors who have sold shares short to take advantage of a falling market then need to buy them back

"The run-up is probably due to a number of factors," said Michelle Clayman, chief investment strategist at New Amsterdam Partners.

Amazon declines

"We've had a string of horrible days and are probably due for a short-term rally; some companies have reported nice results, particularly in consumer areas; Congress has come to some agreement on reforms of accounting and fraud laws; and finally, J.P. Morgan's reassuring of investors."

However, with so much lingering suspicion and a market susceptible to bad news, few market watchers seemed to put any faith in the longevity of Wednesday's rally.

"We've gone beyond the economics, the valuation, and we're trading on momentum and a lot of fear," said John Davidson, president and CEO at PartnersRe Asset Management.

Shares of Internet retailer (AMZN: down $0.45 to $14.10) traded lower after the company said it would expense stock options. This news seemed to overshadow the company's quarterly results.

It lost a penny a share, a nickel less than what Wall Street was expecting and far less than the 16 cents it lost a year earlier.

Congressional investigators looking at claims that Martha Stewart may have engaged in insider trading in her dealings with ImClone Systems asked for more records from Merrill Lynch (MER: up $1.45 to $35.25), whose brokers were involved in trades before a big regulatory setback for one of the company's drugs.

Rate cut talk

London traders had a horror day as European stocks plunged
London traders had a horror day as European stocks plunged  

Also impacting trade: Salomon Smith Barney equity strategist Tobias Levkovich has cut his 2002 targets for the S&P 500 to 1,000 from a range of 1,200 to 1,250 and the Dow industrials to 9,650 from 11,200, citing "corporate rot."

Trading rumors suggested that there may be an emergency Federal Reserve intervention, while Fed fund futures hint that a quarter-point reduction in the overnight bank lending rate has at least a 50 percent chance of taking place.

Reuters is reporting that the Federal Reserve has no comment on the speculation.

In addition, the Bank of England said that it may cut rates.

"If stocks keep deteriorating and the Fed were to cut rates in a coordinated response with the Bank of England, you could see some short-term positive response," PartnerRe's Davidson said.

"But ultimately, rate cuts are not going to help the crisis of confidence. This is a process that is going to take a lot of time. We need to see CEOs signing off on the earnings. We need to see people getting prosecuted."




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