[BRIEFING.COM] Stocks rallied Friday after a surprise move by the Fed to cut its discount rate in an effort to ease fears about a liquidity crisis leading to a credit crunch. 

Although the Fed left the fed funds rate unchanged, the decision to cut the discount rate, and the reasoning from the Fed for doing so, was seen by many as laying the groundwork for a cut in the fed funds rate sometime soon.

The S&P 500 vaulted back into positive territory for the year. After closing lower over the last six straight sessions, the Dow and Nasdaq snapped their losing streaks.

Although today's relief rally was significant and reduces downside risk, the major averages did not garner enough of a surge to finish with weekly gains.

With the growing realization that liquidity was not getting to where it was needed, despite several sizable Fed infusions into the banking system, the Fed unexpectedly and unanimously cut the discount rate by 50 basis points, to 5.75% from 6.25%. Policy makers said "market conditions have deteriorated" and "downside risks have increased appreciably" since the last FOMC meeting on August 7.

The Fed's actions and comments helped alleviate the worst of fears that liquidity problems will turn into a full-fledged credit crunch.  Importantly, by using the discount rate as a policy tool at this point, it kept the Fed's credibility intact as the action doesn't appear inconsistent with recent policy statements dealing with the fed funds rate that emphasize concerns about inflation.

However, the Fed's comments did suggest a cut in the fed funds rate is possible.

The major European bourses were slightly lower before the Fed stepped in to help ease liquidity problems in the banking system but rallied on the news to close up 2.3% on average. Japan's Nikkei 225 plunged 5.4%, logging its biggest one-day percentage loss since 2001 as the yen climbed to fresh 14-month highs against the dollar. However, it was closed and unable to benefit from the Fed saying that it stands ready to "act as needed" to help the U.S. economy.

Not surprising, the sector that had been hit the hardest by underlying credit concerns for several weeks -- Financials (+3.6%) -- led the charge and fueled a relief rally that pushed all major indices up more than 2.5% on average right out of the gate.

While a dramatic steepening in the yield curve following the Fed's decision helped rate-sensitive banks (BKX +3.5%) and brokers (XBD +4.1%), investors placing bets on even further downside in depressed financial stocks ran for cover. Already benefiting from an analyst upgrade, Countrywide Financial (CFC 21.40 +2.45) was the sector's best performer (+13%) and among the most active stocks on the S&P 500.

Of the other nine sectors closing sharply higher, Energy turned in a similarly strong performance. The increasingly influential sector piggybacked on a rebound in oil prices following the commodity's 3.2% sell-off Thursday. Crude for September delivery rose 1.4% and closed near $72/bbl as Dean strengthening into a category 3 hurricane in the Eastern Caribbean raised concerns about supply disruptions in the Gulf of Mexico.

Crude got an added lift following the Fed's latest efforts to prevent a more severe economic downturn and traders' tentativeness to be short over the weekend.

The monthly expiration of index options this morning also exacerbated the broad-based move to the upside at the onset of today's action. Volume was well above normal, in part due to today's double witching, and provided even more conviction behind a rally that left all 10 sectors surging 2.4% on average and the majors closing near their best levels of the afternoon.

[BRIEFING.COM] As presaged in the last comment, stocks have broken out of their recent trading range. Fortunately for market bulls that have been battered in bruised for weeks, the indices so far are extending their reach to the upside. The S&P 500 is pacing the way among the majors with a 2.4% advance.

The Dow and Nasdaq aren't far behind, though, sporting strong gains of 1.8% and 2.2%, respectively, that leave them well on track to snap a six-day losing streak.

The Russell 2000 is faring even better, surging 2.7%. That's not too surprising, though, since small-cap companies are more dependent on borrowing than large caps and the index has been the biggest laggard among the most closely watched indices.

[BRIEFING.COM] Stocks have settled into a relatively narrow range, albeit at firmly higher levels, heading into the final hour of trading. That holding pattern is subject to change, however, as evidenced by the havoc that late-day volatility has played with equities over the last few weeks.

Today being an options expiration Friday is likely to add to the choppiness going into the close as will participants decisions to hold their short positions over the weekend.

[BRIEFING.COM] Finally, everything from Explorers (+2.7%) to Refiners (+2.7%) are getting a lift from oil's late-day rally. So much so that the Energy sector's 3.1% gain now matches that of Financials.

While the latter sector carries almost twice the weighting on the S&P 500 than Energy, and is providing a larger source of support behind today's bounce, Energy's advance is helping to offset oil's uptick.

Also noteworthy is the resilience on the part of transportation stocks to higher energy prices. Strength from Airlines and Trucking is helping the economically-sensitive Industrial sector also turn in a commendable performance.

[BRIEFING.COM] The market has bumped into another headwind, but hardly enough to make a significant dent in what is still shaping up to be a solid day for equities. This time around, a spike in oil prices has armed the bears with an excuse to take some (albeit not much) money off the table. The major indices are still up about 1.5% on average.

While today's move by the Fed has left many believing a rate cut is forthcoming, with its bias shifting from one focused predominantly on inflation, oil prices climbing back above $72/bbl remains a concern that can't completely be overlooked, especially when the Energy sector so far has failed to trade higher in sympathy. It is now up 2.9%, which is still very supportive for the broader market; but 15 minutes ago its intraday gain stood at a stronger 3.2%. Crude for September delivery is now up 1.6% near $72.15/bbl as Dean strengthens into category 3 hurricane in Eastern Caribbean.

With potential supply disruptions in the Gulf and the Fed's move to prevent an economic downturn, traders also don't look like they want to be short over the weekend.

[BRIEFING.COM] Onward and upward remains the driving mantra today as a renewed wave of buying lifts the indices to fresh afternoon highs. The gain on the Dow exceeding 190 points from yesterday's close has triggered the re-initiation of NYSE trading curbs.

The Fed Funds rate now trade down to 5.125%, below the Feds target. Even though such a scenario over previous sessions offered evidence to suggest available liquidity wasn't getting to those borrowers who needed it most, the drop in the discount rate earlier, as evidenced by the Financial sector (+3.7%) flirting with session highs, offers added assurance that banks are getting the credit they need.

Exacerbating the move higher has been the ability by the S&P 500 breaking through key resistance (1440) and the Nasdaq climbing back above its 20-day moving average (2499).

[BRIEFING.COM] Not much has changed since the last update, but the bulk of industry leadership remains positive. The Dow is holding steady above 13,000, getting its biggest lift from a 3.4% surge in Exxon Mobil (XOM 83.44 +2.77). JP Morgan Chase (JPM 47.20 +1.73) is turning in the best performance on a percentage basis (+3.8%).

Of the other 24 components catching a bid, notable names trading sharply higher include AIG +3.1%, BA +2.5%, C +2.8%, GE +2.7%, HD +2.5%, HPQ +2.5%, and MMM +2.1%.

A 1.7% advance on the S&P 500 easily keeps it back in positive territory for the year. As of yesterday's close, the S&P 500's modest 0.3% still left it down 0.5% for 2007 and about 9.1% below its July 19 record finish.

[BRIEFING.COM] The afternoon session gets underway with stocks retracing their best levels of the morning. The Financial sector is picking up steam as its 3.3% surge now leaves it year-to-date decline at around 7.0%. It was down as much as 14% on the year during Wednesday's losing session.

After trading up at 5.375% just an hour ago, the Fed Funds rate trading back down to 5.25% and matching the Fed's target rate is offering added relief.

[BRIEFING.COM] A day after bargain hunters exhibited a valiant effort to pare what was clearly shaping up to be another sizable sell-off, only to come up shy of gains for all thee major indices, a surprise move by the Fed this morning has given the bulls a green light to finish what they started a session earlier.

About two hours before the market opened, more unwinding in the yen carry trade suggesting another mass exodus among speculators raised global liquidity concerns. So much so that Japan's Nikkei 225 plunged 5.4%, the biggest one-day percentage loss since 2001, as the yen climbed to fresh 14-month highs against the dollar. The dollar was down as much as 2.0% against the yen but has since pared all of its losses.

Then, since "market conditions have deteriorated" and "downside risks have increased appreciably" since the Fed last met on August 7, central bankers unexpectedly and unanimously cutting the discount window rate by 50 basis points, to 5.75% from 6.25%, helped restore investor confidence around the world. The futures market spiked well above fair value to indicate a strong open for stocks and overseas markets turned the corner. The major European bourses recently closed up 2.3% on average.

The move confirmed the Fed's concerns about the turmoil in the financial markets, eased the worst of fears that liquidity problems will turn into a full-fledged credit crunch, and gave policy makers some breathing room to potentially lower the fed funds rate target from 5.25% without appearing inconsistent with the recent policy statements.

Not surprising, the sector that had been hit the hardest by such lingering concerns -- Financials (+2.7%) -- fueled a relief rally that pushed all major indices up more than 2.5% on average just 10 minutes after the opening bell sounded. While a dramatic steepening in the yield curve following the Fed's decision was the most noticeable reason for the bounce in rate-sensitive banks and brokers, investors on the wrong side of the tape since credit concerns began to surface also ran for cover.

The monthly expiration of index options this morning also exacerbated the broad-based move to the upside at the onset of today's action. Volume is running above normal, in part due to today's double witching, and providing even more conviction behind a rally that leaves all 10 sectors in positive territory and the majors up more than 1.0% on average.

[BRIEFING.COM] After consolidating some of this morning's surprise rally, which was exacerbated by the expiration of index options at the open, stocks are bouncing back. Intraday gains for all three indices are back above 1.0%, with the S&P 500 leading the way now that all of its 10 economic sectors are in positive territory. Strength throughout the influential Financial sector (+2.6%) remains the key to today's sizable advance.

Aside from the obvious leaders, like banks (BKX +2.8%) and brokers (XBD +3.0%), Life & Health Insurers (+2.7%) have recently broken into today's top 10 after Fitch said it views subprime mortgage exposure for U.S. Life Insurers as "manageable." Asset Managers (+4.0%) are today's best performing S&P industry group; the Financial sector accounts for six of today's best performing areas.

[BRIEFING.COM] The indices continue to sport broad-based gains, but the market continues to make lower lows. Reversals in Health Care and Telecom, which removes upside leadership to the tune of about 15% of the S&P 500's total weighting, are the most noticeable reasons behind the market's downturn.

The Financial sector (+1.8%), which was up more than 4.0% at the onset of today's action, has seen that advance more than halved. Technology (+0.5%) was up 2.5%, but roughly 70% of that rally evaporating over the last two hours also weakens a significant source of early support. Nonetheless, the bulls are hanging in there enough to underpin a solid gain on the S&P 500 that has it back in positive territory for the year.   

[BRIEFING.COM] Stocks continue to slip from their opening peaks as today's only scheduled economic report leaves current valuations up for further interpretation. At the top of the hour, a survey compiled by the University of Michigan checked in with a preliminary read of 83.3 (consensus 88.0), showing that sentiment eroded this month. That's the weakest reading since last August.

Even though there isn't as strong a correlation between sentiment and consumer spending as some might hope, the deterioration in sentiment runs counter to the boost in confidence investors got from the Fed and has given participants an excuse to sell into recent strength.

[BRIEFING.COM] The indices are off their opening highs but are still trading sharply higher across the board. Trading curbs being instituted about 20 minutes ago are limiting the ability of program trading to exacerbate the move to the upside.

Of the 10 sectors trading higher, Financials (+3.3%) is still pacing the way and providing the bulk of early leadership. While a dramatic steepening in the yield curve following the Fed’s decision is a huge reason for the bounce in rate-sensitive banks and brokers, investors on the wrong side of the tape since credit concerns began to surface are also running for cover.

Sector components with notable short interest and enjoying a squeeze include CFC +18.8%, WM +7.4%, BSC +6.6%, LEH +8.0%, and JNS +11.5%. The remaining sectors trading higher are up an impressive 1.6% on average. Of the 147 S&P 500 industry groups, only four are trading in negative territory.

[BRIEFING.COM] As expected, stocks storm higher right out of the gate as market participants rally around the Fed's surprise decision to cut the discount rate. With the growing realization that liquidity was not getting to where it was needed, despite several sizable Fed infusions, the Fed unexpectedly and unanimously cutting the discount window rate by 50 basis points, to 5.75% from 6.25%, has helped restore investor confidence around the world.

The move has confirmed the Fed's concerns about the turmoil in the financial markets, which have "deteriorated" since the Fed last met on August 7, and eased the worst of fears that liquidity problems will turn into a full-fledged credit crunch.

Not surprising, the area that has been hit the hardest by such worries -- Financials (+3.1%) -- is leading a relief rally that leaves all major indices up more than 2.5% on average just 10 minutes after the opening bell sounded.

 [BRIEFING.COM] S&P futures vs fair value: +33.1. Nasdaq futures vs fair value: +28.0.  The S&P 500 and Nasdaq 100 futures are off their recent highs but a bullish disposition remains fully intact as the opening bell approaches.

The Fed's latest effort to help ease liquidity problems in the banking system and saying that it stands ready to "act as needed" to help the economy has restored optimism throughout equity markets around the globe. European bourses are now up more than 3.0% on average.

While the Fed is essentially leaving policy unchanged in terms of keeping inflation in check, policy makers are now better positioned to lower the fed funds rate target from 5.25% without appearing inconsistent with the recent policy statements.

 [BRIEFING.COM] S&P futures vs fair value: +31.0. Nasdaq futures vs fair value: +39.8.  The futures market has spiked to fresh morning highs, now indicating a sharply higher start for stocks.

The now bullish disposition is the direct result of the Fed, in an unscheduled meeting, recently cutting the discount window rate by 50 basis points, to 5.75% from 6.25%. The Fed noted that "market conditions have deteriorated" and "downside risks have increased appreciably" since it last met on August 7.

Assurance that banks will now have available funding and the Fed saying this change will remain in place until it determines market liquidity has improved materially has lit a fire under stocks, especially throughout an influential Financial sector which is pacing pre-market gains and providing significant leadership.

 [BRIEFING.COM] S&P futures vs fair value: +0.7. Nasdaq futures vs fair value: -7.5.  Early indications are now pointing to a mixed start for stocks; but this opening signal is subject to change throughout the morning since sentiment was much weaker just 30 minutes ago. The S&P 500 futures have inched above fair value, as yesterday's valiant effort on the part of the bulls to erase sizable intraday losses and close the major indices above their "corrective" lows appears to be gaining some traction.

Nonetheless, Nasdaq 100 futures are still well below fair value after another sell-off in Asian markets where more unwinding in the yen carry trade raised global liquidity concerns. Japan's Nikkei 225 plunged 5.4%, the biggest single-day percentage loss since 2001.

[BRIEFING.COM] After going more than four years without a market correction of 10%, the Dow, S&P 500, and Nasdaq all endured large enough losses intraday to make such a scenario become a reality.

However, a huge short covering rally in the S&P 500's most heavily weighted sector -- Financials -- triggered a significant broad market advance in the final hour of trading.

At their lows, the Dow, S&P 500, and Nasdaq were down 2.7%, 2.6%, and 2.9%, respectively.  The sharp losses followed an alarming announcement from Countrywide Financial (CFC 20.18, -1.11) that it had tapped the entirety of its $11.5 billion credit line to deal with short-term funding issues. 

Stocks, however, garnered momentum late in the day and staged one of the biggest market turnarounds in recent memory.  All three major indices closed above their "corrective" lows. The S&P 500 eked out a small gain while the Dow and Nasdaq closed modestly lower.

Fears of a global liquidity crunch, which prompted carry-trade unwinds that sent the yen surging the most against the dollar since 1998, were among several issues plaguing stocks right out of the gate.

In fact, when the yen hit its best levels of the day around 1:00 ET, that was when the Dow slipped to its lows of the session (-343 points or -2.7%). At that point, the Dow joined both the S&P 500 and Nasdaq down more than 10% from their July peaks, signaling a market correction for an index containing even the bluest of blue chips.

The extensive sell-off in everything from gold to copper suggested that hedge funds were aggressively unwinding some of their biggest winners. Materials (-1.2%) was the day's worst performing sector, but it too closed well off its lows. It was down as much as 5.2%.

Renewed enthusiasm for the depressed Financial sector was the big story of the day, though. It was down 1.5% early on but closed up 3.5%.

Throw in a handful of encouraging developments throughout the afternoon and investors on the wrong side of the tape since credit concerns began to surface ran for cover.

Speculation of an emergency Fed meeting around 2:00 ET helped counter St. Louis Fed President Poole's comment earlier that only a "calamity" would justify a rate cut.

Bear Stearns (BSC 116.60 13.45) soared 13% amid reports suggesting it may get enough funding from a "deep pocket partner" to silence rumors concerning potentially more adverse results. Fannie Mae (FNM 65.31 +3.86) saying it is in constructive talks with regulators to lift portfolio caps also helped investors look past the Countrywide Financial news.

Separately, it was reported before the start of trading that housing starts plunged to 10-year lows.