NEW YORK (CNN/Money) -
The Dow Jones industrial average soared to its second-biggest point gain ever Wednesday as investors -- who had been running from stocks as if the sky were falling -- flooded back in to buy after weeks of nearly relentless selling.
Investors took heart from developments in the scandals that have been dogging corporate America: the arrest of key executives who were charged with fraud for essentially looting Adelphia, the nation's No. 6 cable company, while the CEO of J.P. Morgan Chase defended his company's business dealings with Enron.
The spate of good news seemed to distract investors from the crisis of confidence that has pressured markets for months, especially the last nine weeks. Also driving stocks higher: news that the House and the Senate have agreed on legislation to battle corporate fraud, and further strength in 3M, the diversified manufacturer that reported strong results and gave an upbeat outlook Monday.
The 30-share Dow, the world's most widely watched stock average, jumped 488.95 to 8,191.29, its second-biggest point gain and its biggest percentage increase since shortly after the October 1987 crash. The Dow, down nearly 170 points earlier in the session, has fallen in each of the last nine weeks.
The Nasdaq composite index gained 61.18 to 1,290.23 and the Standard & Poor's 500 index added 45.73 to close at 843.43. Volume on the New York Stock Exchange swelled to a record 2.74 billion shares.
"There's tremendous relief after all the selling, and statistically, we have some verification that this could be a bottom," said Donald Selkin, director of research at Joseph Stevens. "But that doesn't mean we're going to see another day like this. There's still tremendous negativity."
"The rubber band was stretched tight and this thing was set up like a slingshot," said Raymond James strategist Jeff Saut. "It doesn't surprise me it snapped back. It surprises me it went down in a straight line for so long."
Like many observers, Saut had been calling for a relief rally for some time, only to see stocks crash lower. Now that it's come he thinks that stocks could see gains through the next several weeks, although in the longer term he is cautious on the market.
But the real test of the rally, said Miller Tabak strategist Pete Boockvar, will be in the days to come. "This is just froth if we don't get some decent follow-through," he said. He worries we could see a repeat of what happened earlier this month, when the gains from a big rally on July 5 quickly evaporated, further disheartening investors.
Worries about financial services companies have exacerbated the stock selling in recent sessions. Citigroup (C: up $2.57 to $33.31, Research, Estimates) and J.P. Morgan Chase (JPM: Research, Estimates) have come under intense scrutiny for their involvement in the Enron debacle. On Tuesday, the companies were accused at a Senate hearing of helping the bankrupt energy trader manipulate its financial statements.
But in a conference call Wednesday, J.P. Morgan executives defended the company against these charges, saying they had a high degree of confidence in its accounting and will have no problem signing off on its books by the Aug. 14 deadline set by the Securities and Exchange Commission. That's the date the SEC has set by which CEOs much personally vouch for their companies' financial statements.
The news seemed to help check the losing streak suffered by the blue chips, at least for one day, as did continued strength in diversified manufacturer 3M (MMM: up $5.81 to $126.66, Research, Estimates), which Monday posted a higher second-quarter profit that beat estimates and said it expects to top second-half forecasts.
But whether the gains are sustainable remains to be seen.
"This is a classic bear-market rally. I suspect it may follow through tomorrow, but I would say it's premature to get too excited about it just yet," Ted Weisberg, a trader at Seaport Securities, told CNNfn's Street Sweep.
After the close of trade, AOL Time Warner (AOL: up $0.68 to $11.58, Research, Estimates) said that the Securities and Exchange Commission is conducting a fact-finding inquiry into its accounting. The parent company of CNN/Money also reported a second-quarter profit versus a year-ago loss that topped estimates as the media company's cable and movie businesses offset losses in its Internet unit.
The stock of the world's largest media company, already battered, slumped in after-hours trading.
DuPont, McDonald's top estimates
Among other factors boosting stocks: Chemical maker DuPont (DD: up $2.07 to $43.95, Research, Estimates) posted stronger results Wednesday that topped analysts' estimates, as did fast-food chain McDonald's (MCD: up $1.19 to $24.68, Research, Estimates), while Exxon Mobil (XOM: up $1.24 to $36.33, Research, Estimates) rose after Banc of America upgraded the oil company to "strong buy" from "buy."
And Merck (MRK: up $2.46 to $48.46, Research, Estimates) said late Tuesday that its board of directors has approved a $10 billion stock buyback program and announced a quarterly dividend of 36 cents per share.
In addition, the founder and former chairman and CEO of Adelphia Communications, two of his sons and two other former executives were arrested Wednesday on federal fraud charges. The group also faces charges by the Securities and Exchange Commission surrounding its role in the downfall of the No. 6 cable television operator, which filed for bankruptcy protection last month.
Traders also pointed to broad short-covering, namely, the process in which investors who have sold shares short -- to take advantage of a falling market -- need to buy them back.
"The market has been oversold with all the fear. So partly, you're seeing a response to that," said Robert Philips, chief investment officer at Walnut Asset Management. "J.P. Morgan's comments this morning were also a good first step toward recovering credibility. You had the Senate and the House agreeing on their fraud policy, and you had the Adelphia executives dragged out in handcuffs. All these things are coming to fruition, and the markets are trying to stabilize."
Shares of Internet retailer Amazon.com (AMZN: up $1.40 to $14.33, Research, Estimates) traded lower after the company said it would expense stock options. This news seemed to overshadow the company's quarterly results. It lost a penny a share, a nickel less than what Wall Street was expecting and far less than the 16 cents it lost a year earlier.
Congressional investigators looking at claims that Martha Stewart may have engaged in insider trading in her dealings with ImClone Systems (IMCL: Research, Estimates) asked for more records from Merrill Lynch (MER: up $1.94 to $36.25, Research, Estimates), whose brokers were involved in trades before a big regulatory setback for one of the company's drugs.
Also affecting trade: Salomon Smith Barney equity strategist Tobias Levkovich cut his 2002 targets for the S&P 500 index to 1,000 from a range of 1,200 to 1,250 and the Dow Jones industrial average to 9,650 from 11,200, citing "corporate rot."
Earlier in the session, trading rumors suggested that there would be an emergency Federal Reserve rate cut, although that failed to occur. Current fed fund futures hint that a quarter-point reduction in the overnight bank lending rate has at least a 50 percent chance of taking place.
In addition, the Bank of England said that it might cut rates.
"But ultimately, rate cuts are not going to help the crisis of confidence. This is a process that is going to take a lot of time. We need to see CEOs signing off on the earnings. We need to see people getting prosecuted," said John Davidson, president and CEO at PartnersRe Asset Management.
European markets fell sharply, while Asian markets sold off in response to Tuesday's U.S. drop.
Treasury prices fell, pushing the 10-year note yield up to 4.45 percent. The dollar was a little weaker versus the yen and the euro, which remained below $1.
Light oil futures gained 56 cents to $26.87 a barrel in New York trade. Gold fell $1.20 to $311.40 an ounce.
Market breadth turned positive. On the New York Stock Exchange, winners beat losers 3-to-2 as 2.74 billion shares changed hands. On the Nasdaq, decliners beat advancers by more than 11-to-3 as 2.16 billion shares traded.
Historically, there have only been five times when the Dow has declined for nine weeks straight, and in each case, it has rebounded after the down period, Joseph Stevens' Selkin said. This was the case in 1967, 1974, 1987, 2001 and now.
In addition, the market has stronger fundamentals to sustain these gains now versus historic bear markets, with an improving profit picture, economy and low interest rates.
The sharp drop of October 19,1987, came at the end of a five-year bull run. But unlike the crash of 1929, which led to the Great Depression, by 1989 the Dow had regained all the value it had lost in '87.
Another aspect to consider: Some technicians had considered the 7,500 level a key one on the Dow. Earlier in Wednesday's session, the Dow hit 7,523 and then bounced off of that.
"Tomorrow may or may not be an up day," Selkin said, "but based on these statistics, we shouldn't see a worse low."