Stock markets rallied big—again—yesterday on news that two big financial players are taking multibillion-dollar hits. Yes, news has been so bad for so long on Wall Street that things like UBS announcing a $19 billion write-down of its assets and, along with Lehman Brothers, raising billions of dollars in capital to stay afloat, are seen as something akin to good news.

The Wall Street Journal says on A1 that part of the relief is that the banks and investment banks are dropping fewer nasty surprises these days because everyone is already expecting bad news, meaning the markets may have priced in the profit hits. The Dow Jones jumped about 392 points (3.2 percent), while the broader S&P 500 index rose 47.48 points (3.6 percent). Bloomberg says it was the best start to a second quarter since 1938, and the WSJ on C1 says it was the market’s sixth 300-point gain since September, which before then hadn’t had even one since 2002.

Fed-bolstered floor is key

The New York Times notes on page one that the rally was one of the biggest that wasn’t boosted by government intervention, or “Fed steroids” as one investor puts it. But the Federal Reserve’s extraordinary move on the day after the Bear Stearns collapse to open direct lending to Wall Street (it’s easy to make money when you can borrow at rates cheaper than inflation), taking as collateral any old thing the I-banks can dig up, is what’s fueling the upturn. Investors assume, correctly, that the Fed won’t let another big investment bank fail, and that’s put a floor under stocks for now—the S&P is up about 8 percent since that move.

The Dow is now off just 11 percent from its peak six months ago, and investors appear to be betting that this storm will somehow mostly bypass non-financial stocks. The Journal:

Still, the rally, which was also driven by investors looking to put money to work on the first day of the quarter, only brought the market back to where it was a month ago. And credit markets remained frozen despite the efforts of central bankers to get banks to start lending again. The coming first-quarter earnings season is expected to bring yet another wave of billion-dollar write-downs by financial firms.

The WSJ also notes that stocks have tended to rally after these announcements:

Global investors have been fooled by more than one false dawn since the financial crisis began last year. On Oct. 1, shares of Citigroup Inc. gained 2.2% after it announced a $5.9 billion write-down on its subprime-mortgage exposure. On Oct. 5, Merrill Lynch & Co. admitted to a $5.5 billion write-down, sparking a 2.5% rally in its stock. On Nov. 8, shares of Morgan Stanley gained 4.9% after it announced a $3.7 billion loss on subprime exposure. All of those rallies proved premature, as the falling value of mortgage investments forced the banks to take billions of dollars in additional write-downs.

World not ending after all

The Financial Times on its front page (and the WSJ in the C1 story above) questions whether the rally is because investors are more confident or if it’s being driven by short-sellers scrambling to cover their trades. It notes dryly the markets’ seeming schizophrenia:

The uncertainty about the markets’ direction reflected the fact that stocks rose after another round of bank writedowns and capital-raisings—developments that might have been expected to send prices lower.

The rally also appears to be driven by the fact that there’s lots of cash floating around out there that has to be put somewhere and investors have gotten skittish about skyrocketing commodities, which had been seen as a haven for decent returns. We don’t see this noted anywhere. But gold fell to $880 an ounce yesterday, it’s lowest point in six weeks.

“The market has gotten some news that indicates that the world is not going to come to an end, and as a result has been able to rally,” said Gordon Fowler, chief investment officer at Philadelphia money-management firm Glenmede Trust.

Blame it on the shorts

Speaking of those big, bad short-sellers, Lehman Brothers is running to the Securities and Exchange Commission with what it says is evidence that hedge funds have conspired to drive its share price down, the FT reports on its front page, expanding on something the WSJ briefly touched on yesterday.

This comes after Bear Stearns execs whined about similar dark acts:

Lehman’s submission to the SEC follows private complaints by Bear executives that hedge funds conspired to spread rumors about the bank.

These executives say the rumors drove down Bear’s shares and caused creditors and counterparties to abandon the bank, pushing it to the edge of bankruptcy and forcing its sale to JPMorgan Chase.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.