Fed's Rate Cut Limits Selloff by Stocks

A surprise Fed rate cut helped hold back a massive selloff in the stock market, although stocks closed lower on continued worries about the US economy.

Major indexes pared steep early losses as financials and retail showed surprising strength. Still, the broader market remained volatile as recession fears continued to weigh on stocks despite the Fed move and a promised economic stimulus by the White House and Congress.

Expectations that a recession would become reality hit their all-time high Tuesday on the Intratrade predictions market, with the chances at 77.5 percent.

Those fears prevailed even after the Federal Reserve cut the fed funds rate to 3.5 percent, down 75 basis points as the central bank looked to rescue markets from plunging into the first bear market since October 2002.

"The Fed has certainly caught up in one fell swoop to where they should have been all along," said Mike Burnick, director of research at the Sovereign Society. "We're getting a bounce, which is not unusual at this point."

Trading was volatile, with the CBOE's Volatility Index , which is considered a strong gauge of market fear, soaring.

Investors flocked to safe-haven bonds and oil fell well off its recent high above $100 a barrel. ExxonMobil was one of the biggest Dow drags.

But retail posted a strong move upward, with Home Depot leading Dow gainers. Retail overall was up more than 4 percent for the day, boosted also by Bon-Ton and Sears Holding .

Market expectations were for a short-term rally that could still fizzle as the credit collapse winds its way through the broader market, and investors continued to question Fed Chairman Ben Bernanke's leadership.

"You're talking about the underlying implosion of the credit class which can't be fixed with a few rate cuts," said Tony Sagami, technology and Asia analyst at MoneyandMarkets.com. "Gentle Ben (Bernanke) will do everything he can to prop up asset prices. We still haven't seen the White House stimulus plan yet, and it should be very aggressive. You're going to get a nice bounce."

Financials Hang Tough

Financials surged into positive territory, as Bank of America and Wachovia both missed analyst estimates yet saw shares gain.

Other financial giants also were doing well and regional banks were among the biggest winners of the day, with KeyCorp leading the way after posting strong quarterly earnings.

Battered bond insurers MBIA and Ambak skyrocketed after the latter said it had a higher asset value than Wall Street believes.

Home builders also posted a nice rebound, with shares up sharply at Hovnanian and most others in the industry.

The tech-laden Nasdaq paced the losers throughout the day, with Microsoft leading the index down after the company announced a partnership with Citrix Systems to create new virtualization products.

Amid the frantic early selling, which saw the Dow fall nearly 500 points, analysts advised investors not to panic as many did during Black Monday on Oct. 19, 1987.

There was even belief that the heavy selling Tuesday could ease enough so as to register a modest gain by the end of the trading day, or at least set the stage for a rally later in the week. A scenario in which indexes would gain before close became increasingly unlikely as skepticism persisted over the effectiveness of the rate cut and stimulus plan.

"We have a highly increased chance that we've seen a selling climax and an oversold bounce," Burnick said. "It wouldn't surprise me to see the markets get into positive territory today or have a rally attempt later this week."

Procter & Gamble , the world's largest household products company, fell sharply, while Apple and chipmarker Intel also were among the biggest losers on the Nasdaq.

Market breadth was negative, with decliners beating advancers 2 to 1.

© 2009 CNBC.com