Another record, this one positive

The Star-Ledger, October 14th, 2008

Another record, this one positive

by Sam Ali/The Star-Ledger

Tuesday October 14, 2008, 12:05 AM

It was another day for the record books.

Having just come off the worst week in the stock market's history, Wall Street investors stormed back into the market, D-Day style, fueling the biggest one-day rally in history, with all major indexes closing more than 11 percent higher. The Dow Jones industrial average soared a jaw-dropping 936 points, its largest one-day point gain.

Fueling the euphoria was a feeling among investors that the worst of the credit crisis may be over, after the Federal Reserve and international central banks launched a series of coordinated steps over the weekend to shore up the global banking system and inject banks with liquidity.

But with 600-, 700-, and now 900-point swings apparently becoming the norm, investors can't help but wonder what Wall Street has in store for them today as they grapple with concerns about banks, the stagnant credit markets and the overall economy.

"The bears and bulls are now fighting for territory," said Ken Kamen, president of Princeton-based Mercadien Asset Management. "A week ago, the bulls just rolled over and said, 'Leave us alone.' But now they're coming out of the pen and starting to bargain-shop. The feeling is that this selling is just overdone and now we're seeing a fight for the bottom."

Investors who can stomach the gut-churning ride should brace themselves for a lot more volatile, back-and-forth trading in the coming days and weeks, he said.

Sean Hannon, president of Westfield-based Epic Advisors, said yesterday's rally was encouraging but that it would be naive for investors to think the coast is now clear.

Many investors have been conditioned to believe severe market downturns are immediately followed by equally impressive market upturns, he said. And granted, the Dow's nearly inconceivable gain yesterday seems to play into that theme. However, oversold markets can remain oversold for long stretches of time, he said.

"I bought stocks last Tuesday and Wednesday and have nothing to show but losses," he said. "While the CNBC crowd finds a need to call a bottom, I will resist. There is no clear answer to when this market decline will end, what the next price move will be, or which stock sectors will outperform others."

The 936-point gain far outstripped the Dow's previous record for a day, 499 points on March 16, 2000, during the waning days of the dot-com boom. By comparison, it took the Dow 69 years to even reach the 937-point mark, which came in 1965.

In terms of percentage gains, however, yesterday's was only the fifth-largest for the index of blue-chip stocks.

NINTH-DAY SALVE Broader stock indicators also jumped yesterday. The S&P 500 gained 104.13, or 11.58 percent, and the Nasdaq rose 194.74, or 11.81 percent.

The surge in stocks came after a brutal eight days on Wall Street that erased an estimated $2.4 trillion in shareholder wealth.

On Friday, the Chicago Board Options Exchange's volatility index -- known as the VIX and often referred to as the "fear index" -- spiked to an all-time high of 70, more than double the threshold of 30 that is generally taken to indicate investor fear, said Richard Gates, a portfolio manager at TFS Capital.

Yesterday, the VIX fell 14.96 points, or 21 percent, to 54.99, its biggest one-day point and percentage drop.

Gates said last week's bloodbath, which sent the Dow to its lowest level in more than five years, was driven largely by "forced selling" as executives, investment banks and hedge fund managers who had bought shares on margin -- that is, using borrowed money -- were forced to sell millions of dollars worth of stock to settle those loans with banks.

That's one reason bargain hunters were out en masse yesterday, he said.

"Last week people were scrambling for cash," he said. "People had to sell because they had a gun to their head and they needed the cash. People were willing to sell something worth a dollar for 70 cents, just because they needed the 70 cents that badly."

Dirk van Dijk, the director of Zacks Equity Research, said a good way for investors to assuage their fears is to get back to basics.

There are many stocks, such as Exxon, that are dirt cheap, he said.

"Do you really think that Exxon is going to go out of business, regardless of how bad the economy gets?" van Dijk said. "Are things really going to get so bad that people with high cholesterol stop taking Lipitor? I honestly doubt it."

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