Today's rally is because of financial stocks. When you have a sector that's beaten down, you get lots of short covering and bottom fishing rallies. This is multiplied when its a sector like financials which comprise so much of the large indexes. It has happened a few times already in 2008, and will continue to happen. Even though a bank like UBS reported a lot of problems, investors like it because it provides a level of disclosure. Investors hate and fear then unknown. And the known, as bad as it may be, often provides a sense of relief. This is especially the case for investment banks, which many investors have been talked into believing that they'll all collapse. But that is the psychology of Wall Street, and we have to live with it.
Here's an interesting excerpt from Herb Greenberg's column, regarding Bear Stearns and Lehman:
Accusations flew across Wall Street accusing hedge funds of shorting Bear stock and then conspiring to drive it down by pulling their accounts. This may ultimately turn out to be true, but it doesn’t disguise the fact that Bear was the riskiest player in a risky industry during a very risky time. Successful short-sellers figured this out before everyone else.
Link to full column.
Interesting take, and quite believable.