Wall Street's other 'R-word': reluctant
Big swings in the stock market have become the norm this year as recession fears reign. Some strategists see signs of hope but are unwilling to call a bottom.
NEW YORK (CNNMoney.com) -- Was Tuesday's explosive market rally just another head fake or have investors finally shifted from dreading the recession to anticipating the recovery?
Market strategists think it's a little of both.
"There seems to be a growing awareness that the worst is nearly behind the market in terms of the bank sector's problems, although not the economy," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.
But that may not be enough of an impetus to get investors too excited, Ghriskey said, particularly because the economic outlook remains foggy.
Tuesday's nearly 400-point surge in the Dow came on decent, but not especially strong trading volume, after all. And the lack of a follow-up rally Wednesday is another sign of investors' reluctance to call a bottom. The Dow fell nearly 100 points in late trading Wednesday.
What's more, Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams, said a lot of Tuesday's gains were likely fueled by short-covering, particularly in beaten down financials.
Short sellers bet that stock prices will go down. But when the market has a big up day like it did Tuesday, short sellers are often forced to cover their positions, i.e. buy back the shares they've sold short, to avoid big losses.
So some of the buying Tuesday was probably done by bearish investors who were not really signaling that they thought the market had bottomed.
To put it more bluntly, Tuesday was a classic "sucker's rally," said Ryan Atkinson, market analyst at Balestra Capital.
But Atkinson said "it could last as much as a month before the next leg down" because the number of shares being held short, or short interest, is at record levels. That means there is the potential for more rallies generated by short-covering in the weeks ahead.
Still, he cautioned that even though traders may be able to benefit from this, nothing fundamental about the markets has changed for long-term investors yet.
On a more positive note, Rovelli said this week's market moves show that the 'all news is bad news' mentality which dominated trading in the first quarter is changing.
Bad news is good news
Take for example, the reaction to more news of big bank writedowns Tuesday.
UBS (UBS) announced another $19 billion in writedowns related to bad mortgage bets. But investors ignored the staggering sum and instead hailed the company for raising more than $15 billion in cash.
Lehman Brothers (LEH, Fortune 500), subject of rumors that it was heading for a Bear Stearns type of collapse, said it will raise $4 billion in preferred stock.
The news that UBS, Lehman and others are still raising money and pulling through the credit crunch sent the financial sector sharply higher Tuesday and was the main reason for the market's overall surge.
"There are still a lot of questions [about financials], but people are feeling a little better that at least we are over the hump," said Peter Dunay, chief investment strategist at Meridian Partners.
Halfway through a recession?
Investors also seem to be coming to terms with the likelihood that the economy is in the midst of a recession.
Federal Reserve chairman Ben Bernanke told Congress Wednesday that the U.S. economy could shrink in the first half of the year and that a recession was possible.
Dunay said Bernanke's acknowledgement was roughly the equivalent of a CEO finally owning up to a company's problems when all the analysts and shareholders have already been talking about it for months. In other words, investors have already priced in a recession into stocks
To that end, some economists think a recession began as early as November. If so, there could be reason to expect stocks to make a bigger move higher in the near-term. Historically, investors tend to anticipate a recovery halfway through a recession and stocks begin to rise.
The average recession lasts about 10 or 11 months. If this one started in November, April is the midpoint.
However, this recession may not fit the historical pattern. Wall Street faces what some are calling the worst financial crisis since the Great Depression.
"The fear is that the slowdown in housing is so dramatic and the writedowns are so dramatic that this recession is going to last longer than the historical average," Dunay said.
So even though some investors may be feeling a little better of late, they may not be rushing to buy stocks just yet. 
