3 Reasons Markets Rallied After the Big Sell-Off

Markets closed up on Wall Street today: Dow +4.01%, S&P +4.77%, Nasdaq +5.32%, Oil -0.92%, Gold +0.87%.

On the commodities front, Oil (NYSE:USO) fell to $80.56 a barrel, while precious metals were mixed, with Gold (NYSE:GLD) continuing its climb, reaching $1,728.10 an ounce and Silver (NYSE:SLV) falling 5.76% to $37.11 an ounce.

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Today’s markets were up because:

1) Fed. While many stocks were making up for Monday’s losses at a frenzied pace, the Federal Reserve’s announcement this afternoon that it will likely keep interest rates at record lows through mid-2013, citing weak economic growth as well as more temporary factors, like the Japan crisis and high oil prices, temporarily reversed the upward trend. While the news means investors have another year more than previously expected to take advantage of near-zero interest rates, stocks began to fall off after the announcement, maybe because investors were hoping the Fed would do more — QE3 anyone? — or maybe the Fed’s decision to extend low borrowing costs for two more years renewed fears about the economy’s non-recovery. Either way, markets continued to rally after yesterday’s mass sell-off left many valuable stocks ripe for the picking.

2) Oversold. Today’s market gains don’t necessarily represent increased confidence in the market, but rather confidence in individual stocks, many of which became oversold in the last few weeks as fearful investors fled. The S&P 500 was more technically oversold than it has been in the last 10 years, with its 14-day relative strength index down to 16.5%. Anything below 20% generally attracts buyers. The perfect example is Exxon Mobil (NYSE:XOM). Apple’s (NASDAQ:AAPL) market capitalization actually rose above Exxon’s today, despite the fact that Exxon’s annual revenue is four times that of Apple. Though oil prices have been sinking lately, the stock still remains highly profitable for investors. After falling 7.97% in the last five days of trading, XOM shares reversed this afternoon, climbing 2.07%.

3) Banks. With Citigroup (NYSE:C) and Bank of America (NYSE:BAC) leading the way, financials rallied today after Monday’s huge sell-off. The financial sector went from being the worst performing of all 10 sectors on the S&P 500 Monday, to the best performer today. While the Fed’s announcement in the early afternoon caused a slight hiccup in otherwise solid sector growth, financial stocks quickly recovered, climbing higher still. After markets closed on Monday, Standard & Poor’s assured investors that it had no plans to downgrade the banking sector, and in fact, expects higher earnings, improved asset quality and capital in the third quarter.

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