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Markets may have hit bottom, but unclear if bear is gone

Wall street broker Edward H. Radziewicz looks monitor as he works trading floor New York Stock Exchange Tuesday.

Wall street broker Edward H. Radziewicz looks at a monitor as he works on the trading floor of New York Stock Exchange on Tuesday.

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Updated: May 3, 2013 12:14PM

The stock market gained 889.35, to 9,065.12. on Tuesday. It was a nearly 11 percent gain for the Dow Jones industrial average, its second-best day ever after the 936 point one-day rally two weeks ago, and the sixth-largest percentage gain for the Dow.

Almost every market sector participated in the rally. The Nasdaq rose 9.5 percent, gaining 143 points to 1,649.47, after setting a new low days ago at 1,533. The Standard & Poor's 500 index rose 91.59, or 10.8 percent, to 940.51.

Just to put those percentages into perspective, the Dow Jones Wilshire 5000 stock index gained $1 TRILLION! Now, don't you feel better, wealthier?

It's often said that a bear market makes its low at the exact moment of greatest despair and pessimism. So, perhaps no coincidence, the rally came on the same day that Consumer Confidence reached its lowest level since the measure was created in 1967, falling to 38 in October from 61.4 in September.

Another report -- the Case/Shiller -- showed that home prices in August fell for the 25th month in a row. National average home prices are now down 20 percent, with far larger drops in many markets.

Clearly, there was enough bad news to go around. And in the midst of all that came the dramatic stock market rally.

Bull hunting

There are plenty of explanations for the sudden, sharp rise. It's been called "bargain hunting" -- everyone piling into stocks that felt the brunt of selling pressure far beyond even what an economic recession would dictate.

Or it could be called "rebalancing" pressure. With stock prices so low, many mutual funds actually felt pressure to buy stocks to bring their balance between stocks and bonds back into line.

Certainly the fact that the Fed is expected to cut interest rates again today helped -- although there isn't much farther to go from the current 1.5 percent level. But there were signs that the Fed's previous actions to add liquidity to the commercial paper markets were taking hold. And the Treasury will start distributing the promised $125 billion to banks this week.

Finally, consider emotion as a reason: We recognize panic on the way down, but it's also possible for panic to take over on the way up -- as portfolio managers fear being left in cash, and short-sellers need to buy stocks to close out positions.

What's next?

Now the debate begins. Is it a rally in a bear market, or the final bottom? Once again, we must acknowledge that we'll only know in hindsight.

If you're dizzy and queasy with all these stock market gyrations, you're not alone. That's one reason to make a long-term investment plan -- and stick with it! At least you won't be kicking yourself for getting out -- and in -- at the exact wrong time.

Here's a thought to keep in mind: For everyone who sells a share of stock at the bottom, there is a buyer. And years from now that buyer will be bragging that he or she bought at the exact bottom of the market! You can brag too -- if you keep up with your regular monthly contributions to your retirement plan mutual funds. Then for sure, you'll have been a great stock market bottom picker! And that's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.

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