Published March 12, 2009

Tuesday surge sparks talk of market bottom

Some money managers think it's time to raise their allocation to stocks

By ANDREW MARKS
NEW YORK CORRESPONDENT

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STOCKS surged in New York on Tuesday, led by the extremely beaten down financial sector, as investors turned from fear and caution to enthusiastic buying.

Something to smile about: Positive news from Citibank CEO and Fed chief's comments on the need to overhaul the financial regulatory system combined to lift US stocks on Tuesday

Driving the gains was a heady combination of an internal memo from Citigroup chief Vikram Pandit, and uplifting words from Fed chief Ben Bernanke and other policymakers.

The Dow Industrials rocketed 379.44 points, or 5.8 per cent, to 6,926.49, buoyed first by the memo from Mr Pandit to other Citi executives that the beleaguered bank turned a profit in the first two months of the year.

The market then got its second wind from Mr Bernanke's remarks that the financial regulatory system on the whole must be overhauled, rather than simply focusing on individual troubled companies.

Also lifting the market was word from Congressman Barney Frank, who heads the House Finance Committee, that he believes the so-called 'uptick rule' which requires that short sales could only come after a move higher in a security's price, might be restored within a month.

The uptick rule hasn't been in effect since 2007, and some market observers believe that has allowed unfettered short-selling to take down shares.

All of the Dow's components gained, but the financials did best, with Bank of America rising 28 per cent, Citigroup up 38 per cent, and JP Morgan Chase gaining 23 per cent.

'It's been a long time coming,' said Manhattan Capital Partners equity trader Cal Owens. 'There's been a feeling that with the market as oversold as it is now, stocks have just been waiting to pop. The big question now is, have we really hit a bottom that we can build up off of or was this the proverbial dead cat bounce that will have us giving up all these gains in a matter of days,' he said.

The stock market was answering that question in the affirmative early yesterday, as all the major indexes bolted from the gate at the opening bell.

By noon, the Dow was up 27.16 points at 6,953.65 and the Nasdaq Composite had gained 13.21 points to 1,371.49.

At the close on Tuesday traders were cautiously optimistic about the rally, given the high volume and wide breadth of gainers. But it is money managers like Hugh Johnson, who've been keeping their clients' money in cash and short-term investment instruments, who will determine whether this rally has legs.

'After a day like yesterday (Tuesday) I've started thinking seriously about getting back into the market,' said Mr Johnson, chief investment strategist at Johnson Illington Advisors money management firm.

Mr Johnson has had clients' stock allocations at the minimum of 35 per cent since late 2007, but he said yesterday morning that several factors are now tempting him to increase those allocations.

'First is the news we got yesterday, and more significantly the reaction to that news,' said Mr Johnson, referring to both Mr Pandit's memo and to Mr Bernanke's comments.

'The market's reaction tells me that the widespread extremes of pessimism we've been experiencing of late that has taken us to about as low an emotional point in the stock market as I've ever seen is ready to swing back up,' said Mr Johnson.

'The market psychology right now reminds me of the darkest days of 1982 and 1974, and you combine that with the fact that stocks now appear undervalued on a fundamental basis according to our calculations, and there's a good reason to get ready to get on the wagon.'

Those sentiments are exactly what Wall Street will need to hear from money managers and institutional investors who are currently keeping their investment portfolios deeply underweighted in stocks if Tuesday's rally is to stand any chance of sustainability.