Dow makes stunning comeback

NEW YORK (CNNMoney.com) -- Stocks staged a big comeback Thursday, erasing most of the session's losses by the close as investors worked through the panic about the mortgage and credit markets which was sparked by Countrywide Financial's latest financial problems.

The Dow Jones industrial average (Charts) fell 15 points, erasing virtually all of the day's declines, after plunging as much as 342 points earlier in the session. The tech-fueled Nasdaq Composite (Charts) index slid 0.3 percent, cutting bigger losses.

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Both the Dow and Nasdaq have now ended lower for six sessions in a row.

The broader S&P 500 (Charts) index gained 0.3 percent, erasing the session's losses.

The Russell 2000 (Charts) small-cap index jumped 2.3 percent, rebounding from a recent battering.

Treasury prices rallied as investors sought safety. The dollar slumped versus the yen and fell versus the euro. Oil and gold prices tumbled.

Stocks have been shellacked for the last week on worries about tightening credit and the fallout from the subprime mortgage market. The declines added to losses over the last month, and by early Thursday afternoon, the three major gauges were off 10 percent from the 2007 highs hit in mid-July, the formal definition of a market correction.

Yet, after hitting those lows Thursday afternoon, stocks began to recover, with the hard-hit financial sector leading the way.

"Equity markets went on another roller-coaster ride Thursday," wrote Michael Sheldon, chief market strategist at Spencer Clarke, in a note to CNNMoney. "However, stocks erased almost all of their losses and finished the session with only minor losses as financial stocks rebounded late in the day."

Big bank stocks including Citigroup (Charts, Fortune 500), JP Morgan (Charts, Fortune 500) and Merrill Lynch (Charts, Fortune 500) all rallied back near the close after having been battered in recent days. Homebuilder, healthcare, airline and retailer stocks also bounced back.

Although the comeback was impressive, the stock selloff may not be over yet.

"A lot of technical indicators show that we are close to a market bottom, so we should be able to bounce a little," said Harry Clark, president at Clark Capital Management. "But could we see another leg down? Absolutely."

Georges Yared, chief investment strategist at Yared Investment Research, said the major gauges probably have another 3 to 5 percent selloff looming before a significant recovery is staged.

And financial companies continue to feel the impact of the recent downturn. Bear Stearns said Thursday that it would lay off 240 employees at a lending unit.

In other corporate news, Dell (Charts, Fortune 500) said after the close of trade Thursday that it will restate results going back to 2003 in move that will chip net income by between $50 million and $150 million.

Also after the close, Hewlett-Packard (Charts, Fortune 500) reported higher quarterly profit, sending the stock higher in extended-hours trading.

Friday's one economic report of note is the August consumer sentiment index from the University of Michigan. Sentiment is expected to have fallen to 88.5 from 90.4 in the previous month.

Stocks fell in the morning, with losses accelerating in the early afternoon after the release of a surprisingly weak Philadelphia Fed index, around the same time the New York Stock Exchange put in trading curbs to limit the market's downside. By mid-afternoon, stocks had trimmed some of those losses.

Credit worries took center stage again Thursday after Countrywide Financial (Charts, Fortune 500), the largest U.S. mortgage lender, said it was forced to tap an $11.5 billion line of credit to offset its liquidity crunch.

Countrywide's increasing troubles over the last few days have exacerbated fears about a global credit crisis.

Additionally, Moody's Investor Service analysts said that the crisis could cause the collapse of a major hedge fund, Dow Jones newswires reported.

"Credit worries are gripping the market," Yared said. "This is an environment where it's shoot now, ask questions later."

But the selling went well beyond the day's events, said Jack Ablin, chief investment officer at Harris Private Bank

"It's all driven by technical factors at this point, because the fundamentals of the market are good," Ablin said. "But people aren't really looking at the fundamentals right now. They're hitting the sell button."

Individual investors have been bailing out of stocks at record levels, according to the Money Fund Report, released Wednesday. It showed that money market mutual fund assets hit a record $2.65 trillion in the most recent week.

After holding short-term interest rates steady at 5.25 percent for more than a year, many investors and other Wall Street pros are looking to the Federal Reserve to cut interest rates at the central bank's upcoming policy meeting Sept. 18.

"What everyone's waiting for now is to see what the Fed will do at the next meeting," Yared said. "Whether they drop 25 basis points or even 50 to really soothe the markets." There are 100 basis points in one percentage point.

Some analysts have called for the central bank to step in earlier, ahead of the meeting, as it did to soothe markets in 2001 after the events of 9/11.

To that effect, the Fed has been adding additional temporary reserves to the banking system, as well as reminding market participants of the normal reserves it puts in place. The Fed added $17 billion Thursday. Central banks in Europe plowed funds into the monetary system more aggressively than the Fed last week.

But Fed bankers have sought to discourage bets they will cut rates before the next meeting.

St. Louis Fed president William Poole said late Wednesday that it would not be desirable for the Fed to act ahead of the next meeting. Poole, a voting member of the Fed's policy-setting committee, said the turmoil in the markets has not spread to the broader economy.

Meanwhile in Washington, Treasury Secretary Henry Paulson said Thursday that the current struggle in financial markets will slow U.S. growth, but not send the economy into a recession. (Paulson elaborated on his remarks in an interview with Fortune Magazine.)

Market breadth was negative, but was greatly improved from the morning. On the New York Stock Exchange, losers topped winners by five to three on volume of 2.98 billion shares. On the Nasdaq, decliners beat advancers by nine to seven on volume of 3.33 billion shares.

In addition to Citigroup and JP Morgan, other Dow 30 winners included AIG (Charts, Fortune 500), American Express (Charts, Fortune 500), DuPont (Charts, Fortune 500) and Walt Disney (Charts, Fortune 500).

The Dow's losers included Alcoa (Charts, Fortune 500), Boeing (Charts, Fortune 500), Caterpillar (Charts, Fortune 500) and Home Depot (Charts, Fortune 500).

Metal and mining stocks slipped in tune with the price of the raw commodities.

In other news, biotech Amgen (Charts, Fortune 500) slipped after saying late Wednesday it will cut 14 percent of its staff and warned that 2007 earnings won't meet forecasts.

On the upside, Network Appliance (Charts) reported better-than-expected earnings late Wednesday and also boosted its current-quarter revenue outlook, sending shares higher Thursday.

J.C. Penney (Charts, Fortune 500) reported second-quarter profits that topped estimates, the retailer said Thursday morning.

Also impacting Thursday's trading: reports showing that July housing starts and building permits have fallen to a decade low.

In global trade, Asian and European markets ended lower.

U.S. light crude oil for September delivery fell $2.53 to settle at $70.80 a barrel on the New York Mercantile Exchange.

COMEX gold for December delivery fell $21.70 to settle at $658 an ounce.

Treasury prices surged in a flight to quality, lowering the benchmark 10-year note yield to 4.65 percent from 4.71 percent late Wednesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar slumped versus the yen, but erased bigger losses accrued before the stock market turned around. The greenback inched higher versus the euro.