Dow rally on hope of Fed rate cut

A frenzied buying spree sent US shares soaring on Tuesday with the second-largest point gain in history for blue chips amid hopes for a rate cut and easing of a global credit crunch.

The Dow Jones Industrial Average rocketed 889.35 points (10.88 percent) to finish at 9,065.12. The gain was eclipsed only by a 936-point advance on October 13, and was the sixth largest in percentage terms for the blue-chip Dow.

The Nasdaq jumped 143.57 points (9.53 percent) to 1,649.47 and the broad-market Standard & Poor's 500 index leapt 91.59 points (10.79 percent) to 940.51.

The surge came amid a strong rebound in global markets but a huge acceleration at the end of the session took market participants by surprise.

"There does not appear to be a specific news item to account for the surge," analysts at Briefing.com said, adding that the gains were "compounded by short-covering."

A so-called "short squeeze" occurs when traders with short positions, betting on falling stocks, are forced to buy to avert heavy losses. A similar short-covering rally pushed up Germany's DAX by 11 percent on Tuesday with many traders caught short on Volkswagen shares.

The market action came as the US Federal Reserve opened a two-day meeting expected to deliver a cut in the federal funds rate aimed at stimulating flagging growth and easing the credit crisis. Some analysts also expect the US cut to be followed by reductions by other central banks.

Augustine Faucher at Moody's Economy.com predicted a half-point cut on Wednesday followed by another half-point reduction in December to lower the funds rate to 0.5 percent, which would be the lowest level since the rate began in 1954.

"Further rate cuts would make it very inexpensive for banks to borrow from one another. The Fed is hoping that low rates, along with efforts to increase liquidity, will spur greater lending and borrowing, unfreezing credit markets."

He said that the combination of Fed interest rate cuts, increased liquidity, and fiscal stimulus "will be enough to bring the economy out of recession in the second quarter of next year" but added that "the financial system remains on edge and worries about global recession continue to increase."

Others noted that bargain hunting had been expected after brutal declines of 40 percent or more this year.

"If you have been standing over by the punch bowl, it looks to me like it's time to ask someone to dance," said John Wilson at Morgan Keegan ahead of the opening.

"Taken in toto, the indicators we monitor are at levels that in the past have pointed to a good rally, if not a major turn."

The market was able to shake off a shockingly weak report on consumer confidence.

The Conference Board index on consumer confidence plummeted to a record low of 38.0, down from 61.4 in September, signalling more retrenchment by consumers.

"The collapse in confidence is directly tied to perceptions about economic conditions and that is likely to mean that households will keep their wallets closed," said Joel Naroff at Naroff Economic Advisors.