Stocks rallied to close higher after a report that Bank of America is in advanced talks to buy troubled mortgage lender Countrywide Financial.
The rebound came after investors Street showed mixed reaction to Federal Reserve Chairman Ben Bernanke's comments that the central bank was ready to cut rates to prevent a recession.
Countrywide stock soared 70% after the Wall Street Journal reported that it was close to a deal to be acquired by Bank of America , whose stock also rose. Countrywide's shares had lost nearly 90 percent of their value prior to today's news.
In August, Bank of America invested $2 billion in Countrywide, which has been struggling with the housing slump.
Major indexes had remained mostly negative through the morning but bolted upwards when a news embargo was broken on Bernanke's comments about 12:15 p.m.
Bernanke: Ready to Cut
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
Bernanke had come under harsh criticism for the Fed's slow reaction to the market slowdown. Investors had been debating the size of the rate cut when the Fed meets later this month, with most looking for a half-point cut.
Many were uncertain that Bernanke's speech would be enough to enact positive changes.
"We're basically looking to the Fed to instill confidence in the market and the economy, and I don't know if this speech actually instilled confidence," said Quincy Krosby, chief investment strategist at The Hartford. "I thought it was a good speech, but I think that the speech was hyped when the embargo was broken. You almost got the impression was that he was going to announce the Fed was going to meet tonight."
Many focused on the meaning of "substantive" and what that would translate into regarding monetary policy.
"They can talk the talk, but are they ready to walk the walk? What does 'substantive' mean?' asked Jack Bouroudjian, a principal at Brewer Investment Group. "It's a question of what are they prepared to do."
Others contended that a series of gradual cuts wouldn't be enough and argued that the Fed needs to take a broader step towards what it wants rates to be.
"The problem with what the Fed's doing right now is not so much that they don't get it, it's that they may actually be causing it," said David Kelly, chief market strategist at JP Morgan Funds. "What we really have here is a crisis of confidence, a crisis of credit.
"The problem is the Fed will say itself that rate cuts don't hit the economy for 12 to 18 months out, so if we have a series of rate cuts from here it's really not going to help us in the first half of 2008."
Bernanke's comments sent two-year Treasury notes higher while the dollar tumbled and oil recovered some of its losses.
Also, retail was in play earlier as weak earnings reports created volatility among shares in the sector. Several retailers reported sales reports that disappointed investors, but shares were mixed late in the trading day, with Ann Taylor dropping sharply and Wal-Mart on the positive side.
Meanwhile, in more bad news from the financials, credit card issuer and banking company Capital One said it expects full-year earnings of around $3.97 per share, below its previous expectationof about $5 per share. It blamed higher provision expense and additional legal reserves.
In the banking sector, Citigroup and Merrill Lynch are in discussions to receive more capital from investors, mainly foreign governments.
Also in financials, shares of Thornburg Mortgage fell as much as 12.1 percent to their lowest level in nearly five months after the residential mortgage lender set plans to raise $200 million of long-term capital.
Lower oil prices were positive for the airline industry, with solid gains posted by Northwest, Boeing and United parent UAL.
Airline shares soared further when news broke later in the day of a possible merger between Northwest and Delta.
Intel dropped after an announcement from New York Attorney General Andrew Cuomo that his office was investigating the chipmaker for an antitrust violation for allegedly trying to squeeze out rival Advanced Micro Devices , which saw its shares rise.