Wall Street pulls off stunning comeback

NEW YORK » Wall Street pulled off a stunning comeback yesterday, surging higher in late trading and wiping out what looked to be yet another precipitous decline.

The Dow Jones industrials, down more than 323 points in earlier trading, ended the day with an advance of just under 300 points, according to preliminary calculations.

Volatility has become a hallmark of Wall Street's performance in recent months, and there's no sign of it letting up.

"Volatility is certainly the norm now and not the exception," said Art Hogan, chief market strategist at Jefferies & Co. "We have had 14 trading days so far this year and only two of them have been without a triple-digit swing. Three of those days have had 300-point swings."

Still, some analysts saw some positive signs in the day's trading.

"There does come a point and time when the market itself recognizes that it got out of hand, and that is when bargain-hunters can come in," said Peter Cardillo, chief market economist at Avalon Partners.

The Fed's decision Tuesday to lower its federal funds rate by 0.75 percentage point to 3.5 percent has been met with some skepticism, but it gave intrepid investors yesterday a reason to buy the severely dented stocks in the financial sector.

"You might say this is a belated reaction to what the Fed did this week, compounded by hopes for the Fed to do more next week," Cardillo said.

Traders who bet on the Fed's target fed funds rate were pricing in yesterday a 100 percent chance of a 0.50 percentage-point cut by the central bank when it meets next week.

Rate cuts will eventually boost margins for banks and other lenders, which have been working to lower costs and boost cash levels through layoffs and stock sales. Those companies -- like Citigroup Inc., Washington Mutual Inc. and Merrill Lynch -- were the big winners yesterday.

Moreover, the billions of dollars in mortgage-related losses suffered by the financial companies contributed to months of selling on Wall Street.

"The early leaders in a market recovery tend to be banks, REITs (real estate investment trusts) and homebuilders, as these are the groups that typically would benefit first from a turnaround. And those have been the market leaders this week," said Steve Goldman, chief market strategist at Weeden & Co. "What has happened is the Fed is flooding the system with liquidity and eventually we should see some traction in the economy. And stocks tend to respond first."

The Dow Jones industrial average rose 298.98, or 2.50 percent, to 12,270.17.

Broader stock indicators also surged. The Standard & Poor's 500 index rose 28.10, or 2.14 percent, to 1,338.60, while the Nasdaq composite index rose 24.14, or 1.05 percent, to 2,316.41.

At this point, it remains unclear whether the stock market is close to a bear market or has bottomed out. The year is on pace to log its worst January ever. Still, buying, like selling, can feed on itself and investors want to be sure they don't miss out on a rally. What needs to be seen is whether these gains will easily be knocked down again.