Dow recovers after 200-point plummet

NEW YORK » Wall Street recovered from steep losses yesterday amid hopes for an imminent interest rate cut, but stocks still closed down in response to Merrill Lynch & Co.'s credit-related losses and a sharp drop in existing home sales.

The Dow Jones industrials fell in morning trading by as many as 200 points after the market got one of its most-feared scenarios: Not only is the housing implosion dampening corporate profits, it appears to be accelerating.

Merrill Lynch said it wrote down $7.9 billion from its exposure to mortgage-related securities, while a new housing report showed existing home sales plunged last month.

But the blue chip index reversed direction later in the day, briefly bobbing into positive territory as rumors circulated that the Federal Reserve -- scheduled to meet next week -- might be lowering the discount rate before then.

"Once people hear about a rumor, they cover their shorts. Even though it's just a rumor that's out there," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. Short-covering is when traders undo bets that the market is going to fall. "There was a lot of bad news this morning. It's pretty clear Wall Street wants a rate cut and wants it soon."

The Dow was off just 0.98, or 0.01 percent, at 13,675.25.

Broader stock indicators also dipped, but were off earlier lows. The Standard & Poor's 500 index fell 3.71, or 0.24 percent, to 1,515.88, while the technology-dominated Nasdaq composite index lost 24.50, or 0.88 percent, to 2,774.76.

The Russell 2000 index of smaller companies fell 7.68, or 0.94 percent, to 810.85.

And, the session continued a pattern of volatility as investors remained reactive to news items. Declining issues led advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.58 billion, up from 1.34 billion Tuesday.

The increasing possibility of a Fed rate cut sent Treasury bond prices sharply higher during the session.

The yield on the benchmark 10-year Treasury note, which moves inversely to the price, fell to 4.34 percent from 4.40 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices fell.

Oil resumed its climb after a surprise drop in inventories, with a barrel of light sweet crude up $1.83 at $87.10 on the New York Mercantile Exchange.

The financial sector was among the hardest hit yesterday after Merrill reported a worse-than-expected loss and cited "renewed signs of volatility and weakness" in the market. Shares of the world's largest brokerage tumbled $3.90, or 5.8 percent, to $63.22.

Further deterioration in the housing market could aggravate the financial sector's troubles. The National Association of Realtors reported that existing home sales fell in September for the seventh straight month by a larger-than-expected 8 percent -- the largest decline in records dating back to 1999.

Amazon.com Inc. shares plunged $12.09, or 12 percent, to $88.73 after it reported quarter profit only beat per-share estimates by a penny.