Stocks closed moderately lower, but well off session lows as investors went bargain hunting in selective sectors.
The session was one of the most volatile in some time. The day started off with a more than 200-point plunge in the Dow, but all major indexes battled back to positive territory before selling picked up again late in the day.
This was the biggest intraday point turnaround for the Dow since June 8, 2006.
"The market is trying to settle in at some level," Barry Hyman, Equity Market Strategist at EKN Financial Services, told CNBC.com. "There is a perception change and there's a lot of nervous money still out here. We expect some volatility in the near-term with an upside cap of 2% above current levels."
Utilities led on the positive side for most of the session. Energy shares turned higher after oil rose above $62, but the sector failed to hold on to gains.
Citigroup was a bright spot on the Dow as investors reacted favorably to changes in its Citi credit card business. McDonalds was also a Dow winner after an analyst at Bear Stearns said the fast-food giant could continue its strong U.S. results and succeed in turning around its European division.
"We've been kind of been picking up value since the opening and we've been pretty stable since about 10 am," Stuart Freeman, Chief Equity Strategist, at A. G. Edwards, told CNBC.com. "We had quite a few data points today that suggest we still have a healthy economy and that's probably why the market is holding up here."
"After you see a major selloff like we had Tuesday, you historically end up with a pretty substantial amount of volatility afterward for several months," said Barry Ritholtz, Chief Market Strategist at Ritholtz Research & Analystics "What I'm surprised about is that there seems to be an awful lot of complacency in the market. The general consensus is that everything is on sale and the fear of God has not struck this market. That usually indicates the selling is not over."
Springboard for Rally
The markets began to climb out of a deep decline after a positive manufacturing report. The Institute of Supply Management said February manufacturing activity in the U.S. rose to 52.3, higher than the 50.0 economists were expecting and up from 49.3 in January.
"When slightly favorable data came in this morning, traders used that as a springboard to try to rally," Arthur Cashin, UBS Director of Floor Operations, told CNBC.com. "What has happened to the market is like a patient having a heart attack. Being able to jump out of bed for one day doesn't mean you're healthy. This nervousness is something we'll have to watch over the next several days."
The decline in the markets began overseas. The rise in the yen sent stocks tumbling in European markets and the negative sentiment spread to Wall Street.
Although there were no computer problems reported today, Cashin said transactions were slowed down in the first half hour of trading by a burst of volume, most likely due to heavy trading from overseas investors.
Declining shares outpaced advancers on the NYSE by eight to five.
The Commerce Department's core January PCE index, excluding volatile food and energy prices, rose at a 2.3% annual rate in January, above the Federal Reserve's comfort zone for inflation.
Also, a stronger yen raised worries that risk aversion shown by investors in Tuesday's global equities rout may resurface. A popular strategy with hedge funds is the so-called "carry trade," which is to borrow yen and invest in higher-yielding, riskier assets. Comments by a Japanese officials raised concerns than an unwinding in carry trades may have started.
"We're seeing some weakness here and, I think, that's not surprising," James McGuire, Floor Broker with Christopher J. Forbes, told CNBC. "Rarely are these corrections a one-day event. There are all sorts of stories going around today about hedge funds in trouble. There's concern about the yen carry trade and all of these things are roiling the market."
Treasury prices moved higher, sending yields lower, as investors sold off equities late in the session.
New York light crude futures traded higher at $62 a barrel bolstered by higher gasoline prices. Earlier, oil fell after the Energy Department said natural gas inventories fell by 132 billion cubic feet last week, less of a draw down than expected.
Looking to corporate news, Motorola rose after the company said that corporate financier Carl Icahn has filed to buy more than 4.4%, or $2 billion, of its common stock.
Credit Suisse First Boston is offering a more than $40 billion debt package for a competing bid for Texas energy company TXU, the Financial Times reported. TXU has agreed to be bought by Kohlberg Kravis Roberts and Texas Pacific Group.
And Oracle is buyingHyperion Solutions , a provider of corporate performance tracking software, for $3 billion, according to published reports.
Europe Closes Lower
European markets closed down, but off of their session lows as well. Frankfurt DAX component Deutsche Telekom posted a 43% drop in 2006 net profit, blaming intense competition and price decreases in its domestic market. Deutsche Telekom was down more than 2.4%, and the DAX was lower.
British American Tobacco reported a 10% rise in underlying 2006 earnings, despite smoking bans in key markets. BAT also upped its dividend payout and share buy-back program. Shares in the tobacco giant gained 3%, while the FTSE-100. was lower.
AsiaFalls Lower Despite U.S. Turnaround
The Nikkei 225 Average closed weaker, extending losses from the previous session as Toyota Motor and other exporters lost ground due to concern about U.S. economic growth.
Australia's S&P/ASX 200 Index shed earlier gains to close lower for the third straight session, led by losses in the top banks with investors treading cautiously following a big sell-off in the previous session.
China's Shanghai Composite Index fell closed down 2.9%, hit by renewed selling in financial blue chips after the companies' Hong Kong-listed H shares performed poorly.
Hong Kong stocks fell, taking cues from the sharply lower mainland market, as pressure persisted on Chinese financial plays despite a strong debut by Ping An Insurance in Shanghai.
Singapore's Straits Times Index, which fell nearly 4% on Wednesday, was down another 0.4%, despite strong performance from property, bank and tech stocks.
Markets in South Korea are closed for a holiday and will reopen Friday.