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Dow Rallies in Volatile Session; VIX Soars

The Dow rallied in the final hour of trading as investors went bargain hunting after the index hit a five-and-half year low earlier in the session.

The market initially opened higher on reports that consumer prices were flatin September, while weekly jobless claims fell for the latest week. But stocks quickly reversed after a 10 am report that the Philadelphia Fed's index of mid-Atlantic factory activity fell much more than expected and as industrial output hit a nearly 34-year low.

"Looking at inflation right now is like looking in the rearview mirror while ignoring the train wreck dead ahead," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. "Even Fed policy makers are saying the economy appears to be in a recession, and that is why the stock market has fallen more than 40% from the highs last year, it is discounting a recession if not outright depression."

The Dow Jones Industrial Average retested last Friday's low, breaking through to a new five-and-a-half year low. At one point, the blue-chip index was down 380 points, before recovering all of that and trading up 250 points heading into the final half hour of trading.

If we finish with a triple-digit gain or loss (it could go either way at this rate), it will make 21 out of the past 24 sessions the Dow has made a triple-digit move. In the prior session, worries about recession sparked a massive selloff that sent the blue-chip index down more than 700 points.

The CBOE volatility index, widely considered the best gauge of fear in the market, soared to a new record above 80 before pulling back to the mid-70s.

With record levels of fear in the market, where do we go from here? History might offer some clues as to when the volatility will subside.

The price of a barrel of oil dropped to about $70after a report showed crude inventories rose by 5.6 million barrels, more than double the 2.2-million-increase expected.

Dow component Citigroup was the biggest decliner on the Dow after the bank posted its fourth straight quarterly loss amid credit costs and writedowns totaling $13 billion. Citigroup said it's making good progress on shedding assets and cutting costs but warned that tight credit conditions and the potential global recession could cut into other businesses.

Merrill Lynch shares rebounded after the bank reported its fifth striaght quarterly loss and missed analysts' target amid writedowns of $9 billion, most of which occurred in September.

Bank of New York Mellon reported its profit was cut in halffrom a year earlier but still managed to beat expectations. Its shares rose.

In the tech sector, the world's largest handset maker Nokia missed expectations as handset makers have taken the global slowdown on the chin.

Yahoo jumped 10 percent amid buzz that a Microsoft deal — try to hold your sigh to the end of this paragraph — is still a possibility. Apparently, Microsoft CEO Steve Ballmer said at an IT conference in Orlando that an acquisition of Yahoo would still "make sense economically" for both companies.

And, exhale ...

Diversified manufacturer United Tech reported a 6 percent rise in profit, boosted by continued strong demand for helicopters and products used in commercial construction.

Retailers were mostly lower amid news that this could be the toughest holiday for retailers in more than five years.

Consumers are expected to spend an average of $832.36 on holiday shopping this year, up just 1.9 percent from a year earlier, according to the National Retail Federation. That would be the smallest rise since 2002, when the NRF began conducting the survey. (Check out our Holiday Central blogfor the latest on how the holiday season is shaping up for retailers.)

Of course, shares of discount and wholesale chains such as Wal-Mart , Target and Costco advanced as that's where consumers shop during tough times.

Hedge funds had their worst month ever in September as all major categories of funds chalked up losses over the month. And the Securities and Exchange Commission extended a temporary short sale disclosure rule until Aug.1, 2009.

Elsewhere, U.S. and European leaders agreed to meet this weekend to prepare for a summit to overhaul the global-financial system. Speculation is growing that the Fed will be forced to cut rates again as consumers struggle through the financial malaise.

-- Albert Bozzo contributed to this article.

Still to Come:

THURSDAY: Industrial production; Philly Fed survey; weekly natural-gas inventories; Earnings from Capital One, Google and IBM
FRIDAY: Housing starts; consumer sentiment; Earnings from Gannett, Honeywell and Sony Ericsson

Send comments to cindy.perman@nbcuni.com.

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