The Stock Market’s Gift

The rally I was expecting form the stock market’s severely oversold condition was delivered yesterday, with the Dow Jones Industrial Average up a whopping 276.74 points to 11,239.28, or 2.5%. This was a stock market “gift” many investors were happy to see.

I expect this rally to continue for now, as investors realize the market was so oversold. The key will be how much of a rally we get. The stronger the rally, obviously the better, but a weak rally would be an omen for the market.

Financial stocks had their biggest one-day rally in history yesterday. Again, this was a matter of the financial stocks being so oversold. As I noted yesterday, U.S. bank stocks were down 60% for the year as of Tuesday.

Speaking of banks, JPMorgan Chase, the third largest U.S. bank, reported this morning that it made $2.0 billion, or $0.54 a share, in the second quarter of this year. That profit was about 23% more than analysts had been expecting. JPMorgan shares are down only 15% this year, as the company avoided the big write-downs many of its competitors faced.

So where do we go from here with the market?

In spite of the gloom you read about in the newspaper or see on the TV about job losses and the weak economy, the stock market has several positive things going for it right now.

Firstly, oil price have come down $10.00 in the past two days. The stock market loves lower oil prices. The Dow Jones Industrial Transport Index had an unbelievable day yesterday, up 5.3%.

Secondly, so far, the Dow Jones Industrial Average is still above the mid-point between when the large picture rally started in late 2002 (close to 7,000) and its top in late 2007 (of 14,279). This is technically positive and important.

Finally, the Federal Reserve has been very accommodative. The government stepped in to help save Bear Stearns. It has also basically said that it will not let either Fannie Mae or Freddie Mac go under. Earlier in the week, the SEC announced that it would put an end to naked shorting of some financial stocks. The government’s support in the wake of the weaker economy has been more than what the market could ask for.

Let’s enjoy this market’s rally from a severely oversold condition. And let’s hope it lasts.