Stocks closed the week lower as credit market concerns had investors running for safety but a reversal of misfortune late in the week cut losses significantly.
Buying opportunists snapped up cheap financial stocks on Thursday while the Federal Reserve strengthened that resolve by cutting the discount rate on Friday.
The Dow Jones Industrial Average posted a weekly loss of 1.2%, after a two-day stay below the 13,000 level, the S&P 500 ended down 0.5% and the Nasdaq Composite fell 1.6%.
For the year, the benchmark S&P 500 clung to gains of 1.9% after dropping into negative territory earlier in the week. The Dow remains up 4.9% in 2007 while the Nasdaq has gained 3.7%.
U.S. stocks ended little-changed on Monday, despite investor concerns that more credit troubles may be down the road.
Goldman Sachs said it, along with outside investors, would pour $3 billion of new capital into Goldman's Global Equity Opportunities fund, a long-short quantitative hedge fund hurt by recent volatility.
"I think this is a good sign and a reflection of the liquidity introduction that central banks around the world started last week," said William Rutherford, president of Rutherford Investment Management. "Goldman Sachs seems to be working its problems out, but we still don't know where all the dead bodies are."
Qwest Communications named Edward A. Mueller as its new CEO, replacing Richard C. Notebaert.
Stocks ended Tuesday down sharply and the Dow sunk more than 200 points amid continued credit market anxiety and weak guidance from Wal-Mart Stores.
Investors, already jittery about the credit markets, became more concerned after reports of liquidity problems at a money market fund and more negative headlines for mortgage lenders such as Thornburg Mortgage.
"The market psychology is very brittle right now," Alec Young, equity market strategist at Standard & Poor's, told CNBC.com. "Right now we should be seeing some signs of stabilization, but we're having trouble getting momentum. The financials are the anchor that keeps weighing down the market. People don't know where the bodies are buried."
Wal-Mart cut its quarterly andfull-year earnings estimate, saying that economic pressure weighed on sales. The world's largest retailer missed expectations for its fiscal second-quarter profit and revenue, reviving concerns about future U.S. consumer spending.
U.S. stocks closed near the lows of Wednesday's trading session as a return of credit market concerns sparked a late market selloff.
The Dow closed below 13,000 in intraday trading, the first time for the blue-chip index since April 25, while the S&P 500 ended down 1.4% to bring it into negative territory for the year.
"Sentiment is getting really, really bearish, which is a good thing," said Tom Schrader, managing director of U.S. listed trading at Stifel Nicolaus. "At some point in the next three to four days we'll get a short-term bottom and a nice rally."
Credit spreads around the world continue to widen as the cost of capital rises and nervous investors have fled to low-risk U.S. government Treasury bills. Yields on the three-month bill fell below 4% for the first time since December 2005.
Countrywide Financial shares plunged 13% on reports the mortgage lender has been unable to raise money from the commercial paper market, while An affiliate of buyout firm Kohlberg Kravis Roberts said it will lose about $40 million from selling $5.1 billion in residential mortgages. Shares of KKR Financial Holdings plunged 31%.
Stocks opened sharply lower on Thursday following more troubles for Countrywide, weak housing data and continued unwinding of yen carry trades, but a late rally erased the bulk of the day's losses in the Dow, which was down some 300 points in afternoon trading.
"This is almost the perfect storm," says Michael Metz, chief investment strategist at Oppenheimer. "The new horror is the carry trade unwinding. There has been a collapse in the beneficiaries of the carry trade like the high-yielding Australian and New Zealand dollars. That, in turn, spurs liquidation of other assets classes like stocks."
Gains were led by shares of Goldman Sachs , Citigroup and Merrill Lynch , all of which had recently traded at or near 52-week lows.
Amgenshares declined sharply after the biotech giant announced a restructuring that will cut up to 14% of its work force, or 2,600 jobs, and cut earnings guidance due to slumping sales of top-selling anemia drug Aranesp due to regulatory scrutiny.
Economic data showed that housing starts slumped more than 6% in July, the lowest level in 10 years, and came in worse than the consensus forecast of about 4%.
The Federal Reserve set the tone and direction of the market prior to the open by announcing a cut in its discount rate. Stocks opened sharply higher with the Dow up more than 300 points in early trading.
"The Fed made a step in the right direction to ease some of the liquidity concerns," said Nick Raich, director of research at National City Private Client Group. "There could be more near-term turbulence, but over the next 12 to 18 months I think investors are going to look back and realize that today was a good day to get in the market."
All ten S&P sectors traded higher, once again led by the beaten-down financial sector with a little help from energy stocks, which rose a rebound in crude oil prices.
Blue-chip gainers included JPMorgan Chase , Citigroup and Exxon Mobil .
Peter Kang is a markets writer at CNBC.com and can be reached at email@example.com.