Stocks pull out late-session advance

NEW YORK (CNNMoney.com) -- Stocks snapped back Wednesday afternoon, erasing earlier losses, as investors continued to worry about the financial markets and the threat of recession, but also opted to scoop up stocks battered in the recent selloff.

The Dow Jones industrial average (INDU) added 0.9 percent with 20 minutes left in the session. The broader S&P 500 (INX) index and the Nasdaq (COMPX) composite both gained around 1 percent.

Stocks had flip-flopped on both sides of unchanged throughout the session as investors mulled the latest woes for mortgage financiers, DuPont's improved earnings forecast, oil and gold prices near records and Goldman Sachs' proclamation that the economy may already be in a recession.

By the afternoon, stocks had tumbled, led by problems in the financial sector. But in the last hour of trade, stocks snapped back.

"It's the old rubber-band effect, where the market was very compressed and just snapped back from a vastly oversold condition," said Steven Goldman, market analyst at Weeden & Co.

In the first five trading days of the year, through Tuesday's close, the S&P 500 lost about 5.3 percent, while the Dow industrials fell 5.1 percent and the Nasdaq composite fell 8 percent.

"It's been a bad start to the year," said Greg Church, president at Church Capital.

Church said a bigger snapback could be in the works, but that it depends a lot on what the financial sector does, since the market is taking its cue from the financials.

The financial sector led the afternoon turnaround, with JP Morgan (JPM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and Lehman Brothers (LEH, Fortune 500) all recovering from earlier losses.

He also said that the Federal Reserve is going to need to step in and take some action, perhaps even sooner than the next policy meeting at the end of the month, a move others on Wall Street are calling for. (Full story).

The financial sector led the downturn until the last hour of trade Wednesday.

MBIA (MBI) said it will cut its dividend and raise $1 billion from the sale of notes, as a means of raising money and avoiding a ratings downgrade. The bond insurer also said that regulators have probed how thoroughly it disclosed risks, and that regulators are now looking at the $1 billion investment it received in December from Warburg Pincus. Shares fell 13 percent.

Countrywide Financial (CFC, Fortune 500) slumped for a second session after the mortgage lender said that the delinquency and foreclosure rate of home loans in its portfolio jumped in December. Shares slumped 11 percent and dragged on Washington Mutual (WM, Fortune 500).

On the upside, E*Trade Financial (ETFC) gained 2 percent. The company said it sold $3 billion in mortgage-backed securities and municipal bonds and that it is getting out of its institutional trading business as it attempts to accelerate its turnaround effort.

Also on the upside, chemical maker DuPont (DD, Fortune 500) said that it will post stronger-than-expected earnings in the fourth-quarter 2007 and full-year 2007, as well as full-year 2008, despite the slowing economy. That sent shares of the Dow component up almost 6 percent.

Alcoa shares were flat ahead of the company's quarterly earnings report, due out after the close.

Market breadth turned positive. On the New York Stock Exchange, winners topped losers 8 to 7 on volume of 1.74 billion shares. On the Nasdaq, decliners topped advancers by 8 to 7 on volume of 2.55 billion shares.

Investment bank Goldman Sachs added to the growing talk of a pronounced slowdown, saying that recent data suggest the economy is falling into a recession.

Goldman Sachs said that as a result of this slowdown, the Federal Reserve is likely to cut the fed funds rate, a key short-term lending rate, to 2.5 percent by late 2008. The fed funds rate currently stands at 4.25 percent after the Fed cut it three times in a row.

St. Louis Fed President William Poole said that fundamentals remain strong and that it is too early to tell if the problems in the housing market will push the economy into recession, Briefing.com reported. Poole was a voting member of the Fed's policy committee in 2007.

Fed Chairman Ben Bernanke is due to speak Thursday afternoon in Washington, D.C., on the economic outlook and monetary policy.

Stocks tumbled Tuesday, extending the abysmal start to the new year, on speculation that Countrywide Financial could file for bankruptcy and a warning from AT&T that it's consumer business is suffering. The corporate news played into growing worries that the economy could be headed for a recession amid the credit and housing market fallout.

Overall, the three major gauges have now fallen at least 10 percent off the recent highs hit in October on a closing level - the technical definition of a market correction. That can spark a big rally, as in November, with people using the selloff as an opportunity to jump back in at lower levels. Or a correction can lead to more selling and eventually a bear market, defined as a drop of 20 percent off the highs.

Treasury prices slumped, raising the corresponding yields on the 10-year note to 3.81 percent from 3.77 percent late Tuesday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the yen and euro.

U.S. light crude oil for February delivery fell 68 cents to $95.65 a barrel on the New York Mercantile Exchange Tuesday. The price of oil seesawed following the morning release of a mixed oil inventories report.

COMEX gold for February delivery rose $1.40 to $881.70 an ounce, nearing record highs hit on Tuesday.