It was a really nice party -- until you three showed up

Wall Street had its mojo working for a second straight session today.

Then came three buzz killers named Google, Microsoft and Merrill Lynch.

Another plunge in oil prices and some better-than-expected bank earnings reports fueled a powerful rally in the regular trading session, lifting the Dow Jones industrial average 207.38 points, or 1.8%, to 11,446.66.

That put the Dow’s two-day gain at 484 points, or 4.4%, after it hit a two-year low on Tuesday.

But after the closing bell, Google, Microsoft and Merrill each reported second-quarter earnings that failed to meet analysts’ estimates. Their stocks are being hammered in after-hours activity, with Google off $40 to $493, Microsoft down $1.60 to $25.92 and Merrill sliding $1.97 to $28.76.

Everything had been going so well for Wall Street’s bulls. Crude oil in New York slumped $5.31 to $129.29 a barrel, the lowest price since June 5 and the third consecutive decline.

Banking giant JPMorgan Chase this morning reported quarterly results that were down but still came in above expectations. The stock zoomed $4.86, or 13.5%, to $40.80, leading a second day of frenzied buying of battered financial issues. Smaller banking firms PNC Financial Services and Huntington Bancshares also beat estimates.

The sudden turnaround in bank, brokerage and other financial stocks has squeezed so-called short sellers, traders who have been betting that the stocks would continue to slide. In a short sale a trader sells borrowed stock, expecting to replace it later with new shares bought for less.

So if a stock they’re targeting rises instead of falls, that’s a problem for short sellers: It triggers many of them to rush in to close out their bets. Their buying just drives prices higher. Check out East West Bancorp and Downey Financial today, both of which have been heavily shorted.

"The short-squeeze definitely added to the buying" today in financials, said Todd Leone, a trader at Cowen & Co. in New York. Even so, he said, "I think there’s real buying, too. These stocks have been absolutely devastated."

Anthony Conroy, head trader at BNY Convergex in New York, says many investors are reassessing financial stocks in the wake of the massive and indiscriminate selling in the sector since late May.

"There are some very solid companies that were getting hit for no reason," he said. "People are asking, 'How many babies got thrown out with the bathwater?' "

But Merrill Lynch’s quarterly results -- a net loss of $4.7 billion -- may revive fears that the financial system is a long way from recovery. And results from Google and Microsoft won’t help the mood at the next opening bell.

Then again, if the market can overcome that troika on Friday, the idea that stocks just scratched out their summer bottom may gain more currency.

Photo: Nothing wrong with this baby; back in the bath you go. Bob Carey / Los Angeles Times