Epic rally as bargain hunters rush back in

Small-cap stocks remained in rally mode today, starting out the week with a bang after staging a remarkable 11.5% rally off the lows late Friday afternoon. Investors rushed in to snap up bargains, buoyed by hope that another round of global rescue measures would fortify recent lows as the recession bottom. The Russell 2000 (NYSE:IWM) closed up 48.41, or 9.26% at 570.89, generating the largest one-day advance of the year. For the year, the Russell is now down 25.4%, while the Dow is off 29.2% and the S&P 500 is down 31.6%. Amazingly, the Russell is now up more than 20% from the low, but I doubt if any market pundits will be rushing to say this is now a bull market.

Investors seemed to be more confident that governments around the world were now approaching the credit crisis with a concerted, determined effort to unthaw frozen lending lines and not just responding to each new failure on a piecemeal basis. Either that, or the market was simply oversold after historic recent declines and ripe for a big corrective bounce.

If you are in the camp that believes the measures are moving into place to protect the global financial system, then weekend news that government bodies in the United Kingdom, France, Germany and the United State would pour billions into teetering banks, guarantee interbank loans and even purchase equity in key financial institutions appeared to be the perfect tonic to soothe fears about a deep recession spawned by an international lending crisis. The Libor has become the litmus test for the lack of trust in the lending community, and rates fell hard overnight after the latest round of worldwide rescue measures were announced. If you’re curious, Libor stands for the London Interbank Offered Rate and it is the rate at which banks lend money to each other in the wholesale money market. It’s supposed to be somewhat comparable to the Fed funds rate, but right now the Fed funds target is at 1.5% while the Libor rate (for the dollar) is closer to 4.7%

Interestingly, financial and bank shares actually lagged the overall market rise today, as commodity, insurance and healthcare stocks powered the rally. Automobile manufacturers were particularly strong, with General Motors Corp. (NYSE:GM) jumping some 28% as talk circulated that GM was considering some . . .

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