Wall Street went for a wild ride on Wednesday, with stocks opening down 200 points on the Dow Jones Industrial Average, sinking lower, then reversing nearly 600 points and closing up more than 300 points at the end of the day. Traders were encouraged by rumors that the New York State insurance regulator was working with banks on a plan to bail-out beleagured bond insurers, which would inject stability into shaky credit markets.

Builder stocks were up all day on heavy volume, continuing gains racked up on Tuesday, leading some to speculate that the group had finally found a bottom. The S&P home builders ETF (AMEX:XHB) was up 9.70% to $20.35.

Among the group at 4 p.m., before closing prices were settled, Lennar (NYSE:LEN), which was scheduled to report earnings at market close on Thursday, was up 13.99% to $14.99. Meritage (NYSE:MTH) was up 25.7% to $10.81 on top of a near 10% gain on Tuesday; Hovnanian (NYSE:HOV) was up 23.55% to $8.08, adding to an 8% Tuesday gain; Beazer (NYSE:BZH) was up 23.86% to $7.06; Brookfield (NYSE:BHS) was up 16.59% to $13; Standard Pacific (NYSE:SPF) was up 19.82% to $2.60; and Centex (NYSE:CTX) was up 18.79% to $26.93. Toll Brothers (NYSE:TOL) also was up 13.82% to $20.59, and Pulte (NYSE:PHM) was up 21.42% to $13.04, adding to a 7.4% gain on Tuesday. KB Home (NYSE:KBH) rose 12.38% to $22.60, on top of an 8.6% Tuesday gain, and D.R. Horton (NYSE:DHI) was up 12.48% to $14.51. WCI (NYSE:WCI) was up 25.91% TO $3.79; Ryland (NYSE:RYL)up 15.54% to $31.22; MDC (NYSE:MDC) was up 14.21% to $43.65. Best-of-breed Avatar (NASDAQ: AVTR) and NVR (NYSE:NVR), both well capitalized and under-leveraged, were up more modestly, 5.4% to $46.67 and 10.59% to $587.98, respectively.

Stephen East, home building analyst with Pali Research, is one oberserver who believes there is something to this rally. In a research note, he said, "We believe yesterday's action was primarily driven by short covering in the group as the builders still have significant short interest. However, while today's move likely still has short covering embedded in it, we also believe there is a broader bent to it."

He added, "Given the high short interest in the group and particularly in names such as BZH, SPF, HOV, MTH and LEN, expect the move to be exaggerated in the short run. However, if The Fed provides a few more opportunities in the way of rate cuts, expect the broader move to be sustained despite continued dreary fundamentals."

Michael Rehaut, home building analyst at J.P. Morgan Secuities, did not agree. In a resarch note put out on the public builder sector in advance of earnings season, he wrote, "We estimate land charges will represent an average 8.1% hit to equity in 4Q, while FAS 109 will represent an 11.4% hit, for a total 19.6% avg. hit to equity. Moreover, we believe this will result in a significant erosion of the builders' cushions over their minimum tangible net worth requirements to 3% on average, down from 24% in 3Q. As a result, we believe the builders will once again seek amendments on their revolvers from their lenders, which should remain a negative for the group, in addition to falling book values."