Wall Street's Huge Rally Not Unexpected

Economic news on Tuesday was not cheery. Not even close.

Standard & Poor's/Case-Shiller 20-city housing index dropped a record 16.6 % from a year ago, the largest year-over-year decline in the survey's 8-year history.

The Conference Board issued its monthly statement of consumer confidence at a previously-unseen level of 38. Analysts were expecting a drop to 51, from a reading of 59.8 in September.

Still, by 2:00 pm, all major indices were sporting healthy gains... and then they really took off, resulting in massive gains in all manner of equity investments. The Dow alone rose over 600 points in the final two hours of trading.

Dow 9,065.12 +889.35; NASDAQ 1,649.47 +143.57; S&P 500 940.51 +91.59; NYSE Composite 5,733.4399 +536.91

The most obvious cause for the outsized gains is anticipation of a 50-to-100 basis point (0.5-1.0%) reduction in the federal funds rate when the FOMC meets and issues a policy statement tomorrow.

While another rate cut may not seem like such a big deal in these turbulent times, investors seemed to be betting on improving conditions and made moves on stocks - and a general market - that has been exhibiting technical oversold signs. On Monday, the major indices registered new bear market lows, so a move upwards did not catch anyone by surprise, though the size of the gain may have stunned a few short-sellers, feeding into the rally.

So, instead of breaking below 8,000, the Dow ended the day surpassing the 9,000 mark. All but the NASDAQ saw gains of more than 10% for the day. The NASDAQ was up 9.5%.

Market internals confirmed much of the massive gain. Advancing issues outpaced decliners, 4699-1624. New lows remained persistent, however, beating down new highs, 1256-3. Volume was a little higher than Monday's, but not overwhelming, an indication that this rally will be short-lived and without legs as bargain hunters staked out positions and short sellers covered positions.

NYSE Volume 1,723,708,000
NASDAQ Volume 2,811,333,000

Commodity prices remained marginally in the red. Crude oil was down another 49 cents, closing at $62.73. Gold ended lower by $2.40, to $740.50, stopping a two-day winning streak. Silver crashed through the $9.00 level, losing 41 cents per ounce, to end the day at $8.79.

The Fed meeting tomorrow should help boost spirits, but another in a series of expected rate cuts has already been largely priced into the market. There is the distinct possibility that even though the Fed comes through on the rate cut, investors will "sell the news," being that it has been telegraphed to this skittish market.

More wild swings are a near-certainty, leading up to and beyond the November 4 Election day, given the volatility that has been the one constant through the wrenching downturn and sparkling rallies.

The market continues to attempt setting a bottom, though the pattern remains the same, with each successive low being superseded by a following test.