US Market Update

Tuesday's bounce makes a lot of sense from a technical perspective. But proof of whether or not it's a "dead cat bounce" or the start of a true rebound won't come until Wednesday, when more fundamental evidence is in hand.

"I think we rally right into the beige book, and then we'll see what this [bounce] is really made of," says Alex Grace, a trader and hedge fund consultant.

There's no question that Tuesday's rally was much stronger than any of the tepid advances since last Tuesday's plunge. After stabilizing trading sessions in Asia and Europe, the Dow Jones Industrial Average surged 1.3% to close at 12,207.59. The S&P 500 jumped 1.6% to close at 1395.41, its largest day gain in four months, and the Nasdaq Composite finished up 1.9% to close at 2385.14 -- its best day since October.

On the NYSE, 80% of stocks were advancing --- the most since July last year, while 78% of Nasdaq stocks were climbing. Meanwhile, upside volume topped 90% in both venues.

Fundamental Matters

Productivity in the fourth quarter was revised down to 1.6% from an initial estimate of 3%. More significantly, unit labor costs jumped sharply to 6.6% in the quarter and 3.4% on a year-over-ear basis.

The 6.6% pace is the fastest in six years. While some economists explain away the increase as year-end bonus season, the tight labor market and upward-creeping wage inflation have been key concerns for the Federal Reserve. Higher unit labor costs will help keep the Fed attached to its tightening bias.

Elsewhere, pending home sales dropped 4.1% in January, more than the 1.2% decline analysts had expected.

But it seems investors still are paying more attention to words and psychology these days vs. fundamental data. Soothing words from U.S. Treasury Secretary Hank Paulson in Tokyo helped spark a rebound in the mortgage-lending sector. "Credit issues are there, but they are contained," Paulson told reporters, according to newswire reports. He said the U.S. financial industry will not experience "a big impact" from the subprime mortgage meltdown.