Why the Dow Popped Today

Optimism returned in a big way today. Fueled by a perceived growing likelihood of policy action by both European and American officials, the Dow Jones Industrial Average (INDEX: ^DJI  ) logged its largest gain of the year today. By the end of trading, the Dow ticked upward 286 points, for a gain of 2.4%. Other U.S. indexes also participated in the global rally, with the Nasdaq and S&P 500 rising 2.4 and 2.3%, respectively. The positive news also drove the market's so-called "fear gauge," or the VIX (INDEX: ^VIX  ) , 10.2% lower.

Mario Draghi, the president of the European Central Bank, hinted at a growing appetite among European monetary officials for increased stimulus to aid surging interest rates in flailing economies such as those in Spain and Italy. Likewise, Federal Reserve Board Chairman Ben Bernanke will testify tomorrow regarding the state of the U.S. economy. Investors have seen hints within the Fed that officials are increasingly favoring the idea of providing the U.S. with additional monetary stimulus as well.

Around the markets
Cyclical stocks reacted strongly to the news. Market pinata Bank of America (NYSE: BAC  ) outpaced all other Dow components by a wide margin, posting a 7.6% pop on the day. Monetary aid from policymakers would help alleviate investor concerns about Bank of America's possibly exposure to the potential deterioration in global credit markets. Similarly, industrial stocks also posted some of the strongest gains of the day. United Technologies, Caterpillar (NYSE: CAT  ) , and General Electric (NYSE: GE  ) all rose more than 3% during the trading session, despite still remaining in negative territory over the last 30 days. Investors have grown increasingly skeptical about stocks that use globalization as a key growth driver as the recent spate of negative news surrounding China's slowing economy has reached newswires around the world.

What it all means
Investors should take rallies like today's with a serious grain of salt. Although seeing gains across your holdings, remembering that today's rumors remain far from certain will serve investors well in the end. Without firm commitments from officials, the risks that dragged the markets into negative territory on the year remain alarmingly real. At times like this, investors should be making a shopping list of companies they'll want to purchase should markets continue to pull back. The Fool has its own list of three stocks it thinks have the makings of long-term winners, and they're detailed in our recent research report. To find out which companies we think are great bets to stand the test of time, access your report today.

Andrew Tonner held no financial position in any of the companies mentioned in this article. You can follow Andrew and all his writing on Twitter at @AndrewTonner.  The Motley Fool owns shares of Bank of America and has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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