Stocks rose sharply in the final minutes of trading, with the Dow posting a triple-digit gain, as bargain hunters snapped up beaten down shares after credit jitters weighed on the markets all session.
"At some point we have to look at the recent downturn as being slightly overdone," Arthur Hogan, managing director at Jefferies, told CNBC.com. "We're in this tug of war between trading in fear and trading in greed and greed won out today."
All of the ten S&P 500 sectors traded higher, with utilities leading gainers throughout the session. The major averages reversed course after buyers went shopping for technology shares, as well as consumer staples stocks.
Even financials, which had been lower and weighed on the overall market throughout the day, turned higher at the end of the session. Volume was heavy.
Even with the rally, the major averages are still well below the Dow and S&P 500's record closing high on July 19. The Dow down 4.56%, while the S&P 500 is off 5.62% and the Nasdaq is down 6.11%.
Merck was the best percentage gainer on the Dow after a New Jersey court ruled Tuesday that English and Welsh patients cannot sue the company for health problems related to their use of the painkiller Vioxx.
Although stocks ended higher, the session was marked by fierce volatility.
Homebuilders suffered a selloff after Beazer Homes fell sharply, dropping as much as 42%, on rumors that it might not survive the ongoing housing slump. Homebuilding stocks recovered some ground after Beazer said the rumors were unfounded.
"I think we're in for a period of heightened volatility at least for the next several weeks," said Mike Malone, equity sales and trading analyst at Cowen & Company. "I think there's a complete lack of visibility as to what's taking place in the credit markets and how this will ultimately settle out."
"I would not expect to see a stabilization in the housing market until probably the last half of 2008," Mike Larson, senior real estate analyst for Money & Markets, told CNBC.com. "We have a ton of new and existing homes on the market waiting to be sold. We have to work those inventory levels down and that's a lengthy process."
Bear Stearns now faces big losses in a third hedge fund with about $850 million in mortgage investments. The company roiled markets several weeks ago when it shut two hedge funds that invested in risky home loans. Bear Stearns has prevented investors from withdrawing money from the Asset-Backed Securities Fund.
New York light sweet crude futures also had a volatile session, rising to a new intraday high of $78.77 a barrel after the government said weekly oil inventories fell by 6.5 million barrels, about six times expectations. Oil pulled back to finish the session below $77 a barrel as traders took into account the fact that a number of refineries have restarted operations, bringing crude runs to an all-time high.
The ADP employment report, which was being watched ahead of the key Labor Department jobs report on Friday, was much weaker than forecast. ADP Employer Services said U.S. private employers likely added 48,000 jobs in July, far below the Dow Jones estimate of 135,000.
U.S. manufacturing expanded more slowly in July. The Institute for Supply Management said its index of national factory activity slipped to 53.8 from 56.0 in June. Analysts were looking for a more modest dip to 55.5.
Pending home sales in June rose 5%, the largest gain in more than 3 years.
Treasury prices fell, sending yields higher.
The market turmoil didn't put off Rupert Murdoch, however, who pushed ahead with News Corp.'s $5 billion acquisition of Dow Jones . Having received key approval from the Bancroft family, who control the majority of shares in the publisher, the deal will be put to the rest of the company's shareholders.
Meanwhile, Time Warner kicked off the day's earnings, reporting a surprise gain in second-quarter operating profit, thanks to new customers for broadband, digital cable and phone services.
MasterCard said it swung to a profit in the second quarter from a loss last year due to higher card usage and weakness in the dollar. The world's No. 2 credit card franchise reported profits, excluding certain items, of $1.43 a share, higher than the $1.33 a share forecast by analysts surveyed by Thomson Financial. Despite the good earnings report, the stock fell on overall market concerns about credit quality.
European Stocks Close Sharply Lower
European shares finished sharply lower Wednesday, following steep losses in Asia prompted by more trouble in the mortgage sector.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX closed lower, wiping out Tuesday's gains.
The European banking sector traded lower, despite forecast-beating earnings from both BNP Paribas and Deutsche Bank, as worries about the impact of subprime mortgage defaults continued.
Australia's Macquarie Bankwarned of sharp losses in two of its funds.
BNP Paribas delivered a 20% rise in second-quarter net profit, helped by the French bank's investment arm.
Deutsche Bank also reported a boost from its trading operations, which saw the German banking giant post a second-quarter profit of $2.5 billion. Shares of Deutsche Bank were lower.
Basic resources were sold the hardest at the open with U.K. miners BNP Billiton and Rio Tinto both falling more than 4%.
Meanwhile, the future of Italian national airline Alitalia remained in doubt as chairman Barardino Libonati resigned from the company after only 6 months in the role. The move comes a day before a key board meeting for company. Shares of Alitalia slumped.
Asian Stocks Sharply Lower
Asian markets took a severe beating in the afternoon session Wednesday with investors selling down on seemingly justified fears that the credit crunch in the U.S. is spreading to the region. Japan shed over 2%, Australia lost 3.3% while South Korea finished nearly 4% weaker.
News that American Home Mortgage , a large U.S. mortgage provider, could no longer fund home loans and could have to liquidate assets, fuelled fears that the U.S. housing slump was broadening. This was exacerbated by Macquarie Bank's warning that its retail investors face losses of up to 25% in two bond funds because of the fallout of the U.S. subprime mortgage crisis, knocking its shares down 10.6%.
Australia's S&P/ASX 200 Index closed the session 3.3% lower, the biggest one-day percentage fall in almost six years, on declines led by Macquarie Bank. Sentiment was also dented after domestic retail sales rose faster than expected in June, fuelling the risk that the Reserve Bank of Australia may raise interest rates as early as next week
South Korea's KOSPI dropped almost 4%, continuing a sharp retreat from last week's record, as deepening woes in the U.S. subprime mortgage sector raised the specter of a domino effect on global financial markets. The session was dominated by heavy selling of stock futures, leading the Korea Exchange to use a circuit breaker to halt program trading in some futures for five minutes, its first such action for this type of trade since May 2004. Exporters, with their heavy exposure to the United States, fell hardest, with South Korea's best-known companies such as Hyundai Motor and Samsung Electronics each shedding more than 5%.
Tokyo's Nikkei 225 Average tumbled over 2%, falling below the key 17,000 level for the first time since April 2, to hit its lowest close since mid-March. The market was hit by worries about a spreading credit crunch and dragged down by TDK, which fell on sharply lower profit. The broader TOPIX Index also declined, hit partly by hefty losses in bank shares which came under pressure after their disappointing earnings results.
Hong Kong stocks lost 3.1% amid a regional sell-off triggered by the overnight decline on Wall Street as worries about the deteriorating credit market resurfaced. Market sentiment was further dampened by disappointing results of a government land auction on Tuesday, which put heavy selling pressure on local property stocks. Top-tier property developers Sun Hung Kai Properties and Cheung Kong led the blue chip decline.
Chinese shares slide 3.8% in the afternoon session after making initial gains in the morning. Singapore's Straits Times Index was down as much as 3.5%, led by losses in index-heavy bank and property stocks. United Overseas Bank, the country's second-largest lender, and CapitaLand, Southeast Asia's largest property developer were both sharply lower.