All three major indices closed the day lower by more than 1% despite gaining as much as 1.2% earlier. However, they still managed to register the first weekly gain in 2008, quite an achievement considering the panic selling earlier in the week and their counterparties in Europe having just experienced the seventh straight weekly loss. Microsoft’s positive earning reports gave stocks, especially techs, an early boost but were not enough to counter the broad selling in financials and retailers, the two leading groups during the reversal. One key thing to pay attention during a reversal in bear market is how long the leadership groups can hold and this will more or less determine how long the rally can continue. Should the financials fall further, the market may revisit their lows in the next few weeks. Commodities continue to do relatively well with gold hitting another record high. More important, gold is not only hitting new high in US dollar term, but in Yen and EUR as well. It seems that inflation is a legitimate worry among some investors.
Turning to next week, the biggest news is of course the Fed interest rate decision on Wednesday. The Fed was under pressure these days after Scociete Generale reported to have lost $7.2 billion by a rogue trader. It appears that European authorities learned the fraud as early as last Sunday and it is quite possible that the Fed was being notified soon after. Although Fed’s spokesperson immediately denied that they knew about the matter before the 75bps emergency rate cut last Tuesday, the timing was simply too coincident. It seems that the Fed is losing more and more credibility recently and this is certainly not good news for the market moving ahead. Currently the market has priced in more than 50% chance of a 50bps cut with the balance pointing to a 25bps cut. However, I do think it is quite likely that the Fed is going to cut just 25bps based on recent inflation trend. And if this is indeed the case, the market will use it as an excuse for the next round of selling. Other than the Fed interest rate decision, we are also going to get several important economic news, including New Home Sales on Monday, Durable Goods Orders on Tuesday, ADP Employment report and Advanced Fourth Quarter GDP on Wednesday, Chicago PMI on Thursday, Non-farm payrolls and ISM Index on Friday. Any of the news above can be a market mover. On the earning’s front, we are going to get reports from 3M and Yahoo on Tuesday, Boeing and Amazon.com on Wednesday and Google on Thursday. Indeed it will be another busy week.

The market rallied for the second day in a row. News on the economic front was mixed this morning. Initial jobless claims came lower than expected. More important, continuing jobless claim number also dropped by 100K and now is back below 2.7 million. Based on the job numbers, it certainly doesn’t look like a recession is coming. The Existing home sales, on the other hand, dropped by a larger amount than predicted. In addition, single-house price dropped first time on record. However, one thing worth noting is the surge in refinancing activities recently due to drop in mortgage rates. With the Fed widely expected to lower interest rates further(currently the market has priced in a 75% chance of 50bps cut in next week’s meeting), the mortgage rates is expected to fall even more and eventually will become attractive to new home buyers. This may be the true end of the recent sub-prime mess.
At around 1:30pm this afternoon, House leaders Pelosi, Boehner and Treasury Secretary Paulson announced their bipartisan $150 billion fiscal stimulus plan. The check for each individual was $300 as against previously expected $800. But the market didn’t seem to take it negatively. Both financials and retailers, the leaders of the two-day reversal, took a breath today while commodity and tech stocks were taking the leadership. It looks like risk takers are back to the market. Many commodities are doing really well and the CRB index is up 2.2%. US dollar was weakened against major currencies while gold shot up by more than 3% and now is above $910 per ounce. After the bell, Microsoft reported surprisingly positive results and should give Nasdaq another boost tomorrow.

This is the capitulation day we have long been waiting for. Both Dow and S&P had a 5% intra-day reversal and closed almost at the highest points of the day. More important, yesterday's lows were retested and held. Many stocks experienced a 5% or even 10% rally from their intra-day lows and closed at their highest points with above-average volume. Indeed, it is a great day for bulls. The market started the day in a jittery mode as stock markets in Europe dropped on average 4 - 5% following ECB President Trichet's comments that he is committed to fighting inflation while many investors had hoped that ECB would follow the US Fed to cut interest rates. Moreover, unwinding in yen carry trade was very active as many funds were forced to sell risky assets after receiving margin calls.  
Market dropped immediately after the opening bell. At around noon time, Dow was down by more than 300 points and Nasdaq breached yesterday's low. Many high beta stocks were hammered and were down 10% - 20%. Only financials and retailers were staying green. Actually if it were not the strong support from the financials, Dow would be down by more than 500 points. Then later in the afternoon, speculation that the government is going to bail out bond insurers triggered a big rally across the board, pushing Dow up by more than 600 points. Truly remarkable! 
What should investors do from here? Especially for people including myself that have missed the boat (I was out for two hours in the afternoon and missed the big chuck of the rally)? First, avoid chasing stocks at this level. It is important to remember that it is not uncommon to get this kind of reversal in a bear market. But usually such reversals don't last long. Second, it is important to pay attention to market leaders such as financials and home builders in this round of rally. How long the rally can continue will more or less depend on how long those sectors can keep moving higher. Third, patience, patience and patience. During a fast market such as now, it is very easy to forget this key trait that is definitely required for long term success. Keeping a clear mind on big picture is very
important.

A market crash similar to the one in 1987 was avoided, at least for the time being, by the Fed's emergency rate cut. While US markets were closed yesterday, markets around the world experienced a mini crash with many having the biggest one day drop since Sep 2001, when the terrorist attacks in US caused a panic selling around the world. Although the cash markets were closed on Monday, stock index futures in the US did trade for several hours yesterday morning and the S&P 500 contract lost just over 5%, or 70 points, at its worst before trading stopped. The point where the futures stopped trading was so close to limit-down that it looked like a massive panic selling this morning was inevitable. At that point, it was quite clear that the Fed had no choice but to cut interest rates. And indeed, we got the cut this morning before the cash market started trading.
After gapping down nearly 4% for both Dow and S&P500, the market recouped most of the loss before the close. Several previously beaten-down sectors including financials and retailers were leading the way up while technology was clearly lagging. Although the market was more than 2% off its worst level of the day, I think it is premature to call today a capitulation day. On the one hand, we have VIX that earlier touched 37.57 before closing at 31.01. But it is important to keep in mind that VIX can move high and stay high for a period as long as several weeks. On the other hand, with more than half of the major world indices already entering the bear market territory, it's difficult to see that the US market is able to escape such a scenario. US dollar lost grounds against major currencies after today's interest rate cut and gold gained more than 1% after losing as much as 2% in overnight trading. Currently the market has priced in a 100% chance of another 25bps cut in Fed's meeting next week and more than 75% chance of a 50bps cut. After the bell, Apple's forecasts seemed to disappoint Wall Street and sent its shares down by more than 10%. It is worth noting that during a strong market, a report like today's should not be of that great concern and today certainly seems otherwise. It will also be interesting to see how the Asian markets react to today's Fed decision.

Market is closed today.