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tdp2664 InvestorPlace 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 bank’s 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 we’re 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 today’s lows, I advise you to hold off (for now) on most new purchases of stocks or equity mutual funds. Indeed, there’s 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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