One of investors’ fears was put to rest yesterday: The Federal Reserve decided to leave interest rates where they are, which is close to zero. The market responded by taking stocks from earlier losses to gains.

The financial sector led the way, up 2.3%, with Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) all gaining. And even AIG (AIG) ended 2.1% higher despite testimony detailing the financial bailout of the firm.

Though the market rallied following the Fed’s rate decision, there was one dissenting vote for the first time since the financial crisis began over two years ago. In addition, the accompanying statement to the decision said that the economy was “likely to remain moderate for some time” instead of “likely to remain weak for a time.” This will no doubt be a source of debate and could add to the uncertainty regarding the timing of a future rate increase.

The Nasdaq (NASD) rose 0.8% due to enthusiasm over Apple’s (AAPL) excellent earnings report and the publicity surrounding their new product, the iTablet.

But the focus now will not be on technology, but on the president’s State of the Union address. The question that investors have is, will he calm the markets or add to the uncertainties that have erased the early January gains.

At the close, the Dow Jones Industrial Average (DJI) rose 42 points to 10,236, the S&P 500 (SPX) gained 5 points at 1,097, and the Nasdaq jumped 18 points to 2,221.

The NYSE traded 1.3 billion shares with advancers and decliners breakeven. The Nasdaq had volume of 795 million shares with advancers ahead by 3-to-2.

What the Markets Are Saying

Yesterday’s mild bounce came following a penetration to new lows for the month and then a plus-close, and from that standpoint qualifies as a mild reversal. Volume increased but is still less than volume on the recent down days when the NYSE was trading 1.5 billion shares. Another disappointing figure was breadth at breakeven on the Big Board and 3-to-2 positive on Nasdaq.

Wednesday’s Nasdaq advance was halted at the 50-day moving average, which is exactly the high of each of the last three days. But the Dow and S&P 500 have a long way to travel to arrive back at their respective 50-day movings averages. The good news, however, is that all of the leading averages did reverse.

Yesterday, I noted that the internal indicators are grossly oversold and close to levels not seen since March of last year, the market’s sold-off bottom. The other indicators that we watch are the “sentiment” indicators, and they tell us what the various classes of investors are thinking.

The public’s sentiment is represented by the American Association of Individual Investors (AAII ) survey, which measures how “bullish” or “bearish” their members are. At the last reading they were 40% bullish and 34.7% bearish. That is less bullish than the last report, which is a positive, as this is considered a contra-indicator.

The Investors Intelligence’s Advisors Sentiment is also moving from bullish sentiment. Their last report shows bulls at 40%, down from 52.2%, and before that the reading was 53.4%.

Both reports are positive and tell us that fear is creeping back into the market — a good thing.

With both sentiment and internal readings in a stronger position than last week and a mild reversal from the key averages now on the books, my guess is that we are going to see a mild corrective rally, or as the old-timers would say, “a dead-cat bounce.”

But dead cats don’t usually bounce very high, so look for a rally that may take the markets back to their 50-day moving averages but no higher.

At that point traders should plan on placing short sales, and even long-term investors should raise cash. Cats are timid when the bears are circling.

Today’s Trading Landscape

Earnings to be reported before the opening include: 1-800-Flowers, 3M, Acxiom, Alaska Air, Alliant Tech, Altria, Amcore Financial, American Electric, Arctic Cat, Arkansas Best, AstraZeneca, AT&T, AU Optronics, Avnet, Ball Corp., Baxter, Becton Dickinson, Bemis, Bristol-Myers, Brunswick, Cabot Micro, Canadian Pacific, Cardinal Health, Cash America, Celgene, Ceva, Chattem, Check Point Software, Cirrus Logic, CNX Gas, Colgate-Palmolive, Colonial Properties, Columbus McKinnon, Consol Energy, Cypress Cemi, Danaher, Deluxe, Dominion, Eastman Kodak, Eli Lilly, EQT Corp., Estee Lauder, First Commonwealth, Ford Motor, Franklin Resources, Gentex, Goodrich, HarsCo, Harte-Hanks, Helmerich & Payne, Hubbell, International Speedway, InvesCo., Janus Capital, JB Hunt Transport Services, Jetblue Airways, KC Southern, Kennametal, Kensey Nash, K-Sea Transportation, L.B. Foster Co., L-3 Comms, LaBarge, Lancaster Colony, Life Technologies, Lockheed Martin, McCormick, Mead Johnson Nutrition, Media General, Medical Properties Trust, Monro Muffler, Motorola, Multi-Color, Nokia, NVR, Occidental Petro, Old Dominion, Old Republic, OptionsXpress, Oshkosh Truck, Overstock.com, Polaris Industries, Potash, Procter & Gamble, Quixote Corp., Raytheon, Rockwell Collins, Royal Caribbean, Sony, Sybase, T. Rowe Price, Taiwan Semiconductor, Teledyne Technologies, Textron, Time Warner Cable, Transcend Services, TyCo, Umpqua Holdings, Under Armour, US Airways, USA Truck, Waddell & Reed, WesCo., World Acceptance, Xcel Energy, Zimmer Holdings and Zoll Medical.

Earnings to be reported after the close: 3Par, Abaxis, Adaptec, Airgas, Amazon.com, Anaren Microwave, Applied Micro, Ariba, AsiaInfo, Avid Tech, Avocent, Black Hills Corp., Bottomline Technologies, C.R. Bard, CA, Callidus Software, Cavium Networks, Cepheid, Chartered Semi, Chordiant Software, Chubb, City National, CoBiz, Coherent, Columbia Sportswear, Computer Programs & Systems, Compuware, CyberSource, Cymer, Cypress Sharpridge Investments, Cytec, Digital River, Dollar Financial, Eastman Chemical, Exar, Fed Investors, First Financial, FormFactor, Genworth Financial, Greenhill, Hub Group, Informatica, International Coal, Juniper Networks, KLA-Tencor, LaserCard, Lattice Semi, Leggett & Platt, Maxim Integrated, Micrel, Microsoft, MIPS Techs, NBTY, Oclaro, Omnicell, Oplink Comms, Oriental Financial Group, PMC-Sierra, Polycom, Quality Systems, Quantum, Rambus, Robert Half, SanDisk, ScanSource, Seacoast Banking, Semitool, SolarWinds, Stanley, Sunpower, Synovus, Tessera Tech, Thoratec, Varian Semi, Vistaprint and Zenith National Insurance.

Economic reports due: durable goods orders (the consensus expects 1.6%), jobless claims (the consensus expects 440,000), EIA natural gas report, Fed balance sheet and money supply.

Late quarterly earnings news: Altria (MO) 39 cents vs. 40-cent est. , American Electric (AEP) 50 cents vs. 46-cent est., AU Optronics (AUO) 25 cents vs. 12-cent est., Ball Corp. (BLL) 84 cents vs. 71-cent est., Baxter (BAX) $1.03 vs. $1.03 est., Becton Dickinson (BDX) $1.30 vs. $1.20 est., Cardinal Health (CAH) 57 cents vs. 46-cent est., Colgate (CL) $1.21 vs. $1.18 est., CONSOL Energy (CNX) 78 cents vs. 74-cent est., Danaher (DHR) $1.12 vs. $1.03 est., Eastman Kodak (EK) $1.36 vs. 18 est., Eli Lilly 91 cents vs. 92-cent est., EQT Corp. (EQT) 52 cents vs. 39-cent est., Estee Lauder (EL) $1.28 vs. $1.21 est., Ford 25 cents vs. 26-cent est., LaBarge (LB) 18 cents vs. 20-cent est., Lockheed Martin (LMT) $2.17 vs. $1.99 est., McCormick (MKC) 91 cents vs. 91-cent est., Motorola (MOT) 9 cents vs. 8-cent est., NBTY (NTY) $1.18 vs. 94-cent est., Nokia (NOK) 25 cents vs. 19-cent est., Potash (POT) 80 cents vs. 78-cent est., Procter & Gamble $1.49 vs. $1.43 est., Raytheon (RTN) $1.30 vs. $1.23 est., Textron (TXT) 15 cents vs. 9-cent est., Time Warner Cable (TWC) 91 cents vs. 88-cent est., Tyco (TYC) 65 cents vs. 60-cent est., Wesco (WCC) 51 cents vs. 50-cent est., Zimmer Holdings (ZMH) $1.12 vs. $1.08 est.

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