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The Week on Wall Street: Rally To Rout

Stocks closed the week higher, despite a brutal selloff Thursday, as volatility whipsawed the major indices again.

The Dow Jones Industrial Average posted a weekly gain of about 0.4% after hitting a new post-14,000 low during Friday's session. The S&P 500 ended up 1.4% and the Nasdaq Composite rose 1.3%.

Monday

Stocks rallied on Monday and the Dow rose 281 points as investors snapped up shares in the beaten-down financial sector despite uneasiness surrounding the health of credit markets and the U.S. economy.

"We got a big sigh-of-relief rally," said Arthur Cashin, director of floor operations at UBS. "Merrill gets recommended, the financials start to look better and everybody's hoping for a pat on the head from the Fed."

American Home Mortgage filed for bankruptcy protection after laying off almost 90% of its 7,000 employees Friday. Just ten days ago, what was the 10th-largest U.S. home lender froze the 70 cent-a-share dividend scheduled to be paid that day.

Bear Stearns President and co-Chief Operating Officer Warren Spector handed in his resignation Sunday, days after the investment bank said it was dealing with the worst financial market situation in 20 years.

Tuesday

Stocks closed moderately higher on Tuesday after investors shrugged off the Fed's sustained focus on inflation to buy beaten-down financial shares.

The Fed kept the fed funds rate at 5.25%, as expected. Although the FOMC said core inflation readings have improved moderately in recent months, Fed officials said the predominant risk to the economy was that inflation won't fall as expected.

Tyco International said it fell to a fiscal third-quarter loss due to hefty charges primarily related to a legal settlement, but adjusted results still managed to beat Wall Street expectations. Tyco posted income of 55 cents a share, compared with consensus forecasts of 48 cents.

Wednesday

U.S. stocks powered to a sharply higher close on Wednesday despite late volatility sparked by rumors of problems at quantitative hedge funds and a possible pre-announcement from Goldman Sachs .

Shares of Cisco Systems rose to a six-year high after the network equipment maker reported fourth-quarter results Tuesday evening above Wall Street's expectations and boosted its financial forecast. Cisco said profit jumped 25% on strong sales of the routers and switches that direct traffic over the Internet.

Thursday

Stocks sold off across the board on Thursday as investors reacted negatively to news that French bank BNP Paribas froze $2.2 billion in assets in three asset-backed securities funds, saying the lack of liquidity in the U.S. mortgage market made it impossible to value the funds fairly.

American International Group reported second-quarter net income above Street expectations but shares moved lower after the company said it recorded a $78 million loss in its mortgage guaranty business due to weakness in the U.S. housing market.

Friday

Stocks traded lower on Friday but rebounded from session lows after the Federal Reserve added more money to the banking system for a third time in the session to stem a growing credit crunch.

The Fed injected $38 billion of temporary reserves into the banking system. It was the second day the Fed, along with central banks around the world, added liquidity to meet the demand for cash among banks.

"There is a general sense the Fed will do whatever is necessary to avoid a credit crisis," said Charles Rotblut, senior market analyst at Zacks.com. "There definitely is a positive reaction right now, people are relieved they are not being hawkish to inflation. This said, I don't think we're out of the woods yet, investors watching the market will need to keep a bottle of Dramamine close by."

Abby Joseph Cohen, Goldman Sachs' chief U.S. portfolio strategist, told CNBC that the U.S. economy remains strong and maintained a year-end target of 1600 on the S&P 500.

"The fundamentals have gone out the window for awhile and in some cases it means that better value has been created," said Cohen. "We think (the S&P 500) is about 10% underpriced and that typically has been a good entry point."

Peter Kang is a markets writer at CNBC.com and can be reached at peter.kang@nbcuni.com.

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