Stocks rallied to the finish line as the buzz around the market was that a bailout deal could come this weekend and that another bank deal was in the works.
The Dow Jones Industrial Average started the day down more than 100 points, then clawed it all back as traders cherry-picked bank stocks. In the last half-hour of trading, the Dow shot up, finishing up 118.20, or 1.1 percent, at 11140.26.
JPMorgan and Bank of America led blue chips as traders gave those banks the thumbs up. The late-day rally bumped American Express and Citigroup up to the No. 3 and No. 4 spots on the Dow. (Track the Dow winners and losers.)
The S&P 500 also squeaked out a gain but the tech-heavy Nasdaq finished in the red as Research In Motion's outlook rattled tech investors.
For the week, all three major indexes finished lower: The Dow shed 2.2 percent, the S&P lost 3.3 percent and the Nasdaq tumbled 4 percent. Materials were the week's worst performers, followed by financials. Health-care stocks fared the best.
Bailout talks ended without a deal Thursday night but lawmakers remained under pressure as they continued to try to hammer out a deal today.
"I actually think [Congress is] working quite quickly," said Jim Rosenthal, managing director of institutional trading at Ladenburg Thalmann. "The legislative branch of this country does not work in 48 hours ... We're just not used to watching the process," he said. "Legislation usually takes six months and a lot of bickering and fighting."
Still, he remained confident: "Congress will get a deal passed," Rosenthal said.
"Once this deal gets done, the market will probably rally pretty hard for a couple of days," said Michael Cohn, chief investment strategist at Atlantis Asset Management. In fact, "this market might've actually rallied on the WaMu news because it was a takeover — without taxpayer pain."
The U.S. shut down the nation's largest savings and loan, Washington Mutual , late Thursday, wiping out its stock. But it didn't have to bail it out: JPMorgan Chase jumped in to snap up the assets and deposits of WaMu for $1.9 billion.
That left investors wondering who might be next.
"You're talking about the largest failure in banking history, so there is going to be a negative reaction, right?," William Smith, president of Smith Asset Management, told Reuters. "What you're going to see is the strong stronger, and the weak are going to die off."
(How do you invest in a crazy market like this? Click on the video at left.)
And that was reflected in the financial sector, with traders giving a vote of confidence to the likes of Bank of America and JPMorgan but punishing others it thought might be in jeopardy. Wachovia and Ohio-based National City were among the sector's biggest decliners, falling 27 and 26 percent, respectively.
Right around the closing bell, news broke that Citigroup is in preliminary talks with Wachovia.
While all eyes were on Capitol Hill and the financial sector, techs quietly burned.
Research In Motion tumbled 28 percent in what one analyst described as a "slaughtering" of the stock. The company turned in strong second-quarter results but what traders lasered in on was the outlook. The BlackBerry maker is spending a ton of money on new products and marketing when the global economy is heading into a storm.
The stock's plunge may have seemed scary, particularly as we watch banks go down like pins at a bowling alley. But some analysts said RIM's bet was a smart one and the stock is a "buy."
"[W]e believe this pullback is an excellent entry point into a tremendous growth stock," JPMorgan analyst Paul Coster said in a note.
Investors punished other handset makers amid worries about the outlook for smart phones due to the global slowdown, including Apple and Nokia , as well ashandset-chip makers Marvell Technology and Broadcom .
KBHome shares gained 1.9 percent. The homebuilder reported its loss quadrupled in the third quarter from a year ago as revenue plunged 56 percent but ended the quarter with 46 percent more cash as it rolled out a plan to build smaller, more affordable houses in some markets.
In economic news, the final reading on second-quarter GDP showed the economy grew at a 2.8 percent pace, lower than the prior estimate of 3.3 percent but higher than the 0.9 percent rate in the first quarter. Corporate profits were also revised lower.
Meanwhile, consumer sentiment hit a seven-month highin September but increasing worries about the crisis in the financial system clouded the outlook.
Next week will probably be a tug of war, Cohn said, as stocks will likely get a big boost if a bailout plan is passed but pent-up short money will come back to the market when the ban on short selling in financials expires at 11:59 pm ET on Thursday.
Still, "if you've got cash and are chomping at the bit to put to work, now is a good time" Cohn says. "I truly think we might have seen the bottom."
He recommends buying basic materials, alternative energies and selective tech and financial stocks.
Some strategists said that once a bailout is passed, investors will start to worry about the economy. We'll get some serious insight on that next week, with personal income and spending on Monday, the ISM manufacturing index on Wednesday and the August employment report on Friday.
THE FULL ROSTER:
MONDAY: Personal income, spending; Fed's Hoenig speaks; earnings from Circuit City, Walgreens
TUESDAY: Case-Shiller home-price index; Chicago PMI; consumer confidence; Fed's Lockhart speaks
WEDNESDAY: Auto sales; weekly mortgage applications; ADP employment report; ISM manufacturing index; construction spending; weekly crude inventories
THURSDAY: Short-selling ban expires at 11:59 pm ET; ECB announcement; jobless claims; factory orders; natural-gas inventories; Fed's Bullard speaks; earnings from Constellation Brands
FRIDAY: August jobs report; ISM services index; earnings from Family Dollar
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