Finally a rally worthy of the name. Things were looking pretty bleak on Wall
Street after the Federal Reserve issued its policy-meeting news release at 2:15
p.m. yesterday. A sharply divided Fed, citing slower than expected economic
growth and a deteriorating labor market, pledged to keep overnight interest
rates at zero to 0.25% at least through mid-2013. Stocks plunged to new lows for
the year as traders absorbed the gloomy language of the central banks
communiqué. But then, about a half-hour after the Fed story broke, a minor
miracle occurred. A handful of short sellers apparently decided enough was
enough, and they started buying stocks to cover their short positions. Like the
panic selling previously, the short covering fed on itself, driving share prices
higher. The Dow closed up 430 points, with the more representative S&P 500 index
posting an even bigger percentage gain (4.7%). Does the surge mean were out of
the woods? Hardly. Dramatic snapback rallies have punctuated just about every
market collapse of the past 75 years. Sometimes, the rebound occurs right at the
final low. More often, though, the rally burns out after a few weeks or even
just a few days. Then the indexes drift back down to form a deeper, more solid
bottom. Given the likelihood that prices will eventually pull back again to the
vicinity of todays lows, I advise you to hold off (for now) on most new
purchases of stocks or equity mutual funds. Indeed, theres a good chance I may
recommend some hedging vehicles, such as inverse ETFs ( ProShares UltraShort QQQ
NYSE: QID , ProShares UltraShort S&P500 NYSE: SDS ), if the rally begins to run
out of steam. Certain types of bonds not Treasuries offer a safer haven than
stocks
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