Stocks: Roller coaster, then rally
Wall Street returns to positive territory as strength in chips counters $5 jump in crude prices and more worries about Fannie, Freddie, Lehman and GM.
NEW YORK (CNNMoney.com) -- Wall Street advanced Thursday at the end of a volatile session in which investors swayed between scooping up shares hit in the recent battering and worrying about a $5 spike in oil prices and fresh bank and auto sector woes.
The Dow Jones industrial average (INDU) and the Standard & Poor's 500 (SPX) index both gained 0.7%. The tech-heavy Nasdaq composite (COMP) added 1%.
Stocks rallied through the middle of the afternoon as investors welcomed a $15 billion merger in the chemical sector and scooped up technology and other shares hit hard in Wednesday's selloff.
The gains dissolved as oil priced spiked more than $5 a barrel, surging over $141, on new reports that Iran is again testing missiles and that the cease-fire in Nigeria has ended.
But then stocks erased losses and rallied anew heading into the close. The late session advance was sparked by reports that Intel (INTC, Fortune 500)'s CEO said the company has not been hurt by the U.S. slowdown and continues to enjoy strong global sales.
Stocks slumped Wednesday, with the Dow and S&P 500 hitting nearly two-year lows, as questions about Freddie Mac and Fannie Mae's ability to raise capital added to worries about credit markets and corporate profits.
Thursday brought new questions about the ability of the two mortgage lenders to stay afloat, dragging on the financial sector. Automakers continued to plummet as well, with GM hitting a 54-year low, despite CEO Rick Wagoner saying bankruptcy rumors are not accurate.
Investors remain caught between competing influences as they look for clues about the health of the economy and corporate America, said John Forelli, portfolio manager at Independence Investments.
"The drop in unemployment claims and the chemical buyout are giving a positive tone to the market, but at the same time people remain worried about Fannie Mae and Freddie Mac," he said.
The major gauges are now officially in a "bear market," which is technically defined as a drop of at least 20% off the cyclical highs - in this case, last October. Forelli said that he thinks stocks have further room to fall this summer before there is a rebound late in the fall.
Friday brings quarterly earnings from General Electric, with the Dow company expected to have earned 54 cents versus 53 cents a year ago.
Also on the docket Friday: the May trade balance and the July consumer sentiment index from the University of Michigan.
Fannie Mae and Freddie Mac fallout: Shares of the government lenders continued to plunge on worries about a potential collapse. Former St. Louis Fed President William Poole told Bloomberg that the companies were insolvent and may need a government bailout.
Bush administration discussions of what to do should the companies fail have reportedly been amplified in recent days, The Wall Street Journal reported. Fannie Mae (FNM, Fortune 500) lost 13.8% and Freddie Mac (FRE, Fortune 500) lost 22%.
Lehman Brothers (LEH, Fortune 500) lost another 12.4% on ongoing concerns about its solvency after it posted a $3 billion quarterly loss last month.
Wachovia (WB, Fortune 500) said it would report a quarterly loss of between $2.6 billion and $2.8 billion, prompting Moody's to put the bank's long-term debt rating on review for a downgrade. Shares fell over 8%.
Elsewhere in the financial services sector, AIG (AIG, Fortune 500) and PMI Group (PMI) both slipped after Moody's downgraded the companies' insurance financial strength ratings. Moody's also downgraded PMI's debt.
Meanwhile, Treasury Secretary Henry Paulson and Federal Reserve chief Ben Bernanke told Congress Thursday that legislation is needed to modernize the nation's financial system.
Wal-Mart impresses, other retail sales mixed: The world's largest retailer reported stronger-than-expected June sales, thanks in part to the economic stimulus payments. As a result, Wal-Mart (WMT, Fortune 500) said second-quarter earnings will come in ahead of forecasts. Nonetheless, shares slipped modestly. (Full story).
Discounters benefited most from the tax rebates, with Costco (COST, Fortune 500) also reporting better-than-expected June sales. Specialty retailer Children's Place (PLCE) also reported sales that topped forecasts.
But sales at Limited Brands (LTD, Fortune 500) slipped more than expected, reflecting the still-sluggish pace of spending for mall-based retailers amid a consumer spending slowdown.
The number of Americans filing new claims for unemployment fell last week, the government reported, although the number of Americans filing continuing claims rose more than expected.
Other stock movers: Dow Chemical is buying specialty chemical maker Rohm & Haas for $15.3 billion plus the assumption of debt. Shares of Dow (DOW, Fortune 500) slipped over 4% Thursday, while Rohm & Haas (ROH, Fortune 500) jumped 64%. (Full story)
Shares of rival chemical company DuPont (DD, Fortune 500), a Dow component, gained modestly.
Dow stocks Exxon Mobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500) jumped along with the price of oil.
Dow stock Alcoa (AA, Fortune 500) gained 9.7% on reports that Chinese aluminum companies will cut back production. The aluminum maker also reported better-than-expected quarterly sales earlier this week.
Dow stock General Motors (GM, Fortune 500) slumped 6.2%, recovering a bit after hitting a 54-year low. Fellow automaker Ford Motor (F, Fortune 500) lost 22%.
General Electric (GE, Fortune 500) said it will spin off its consumer and industrial businesses, which make light bulbs and household appliances. Shares gained 1.7%.
Market breadth was positive. On the New York Stock Exchange, winners beat losers by a narrow margin on volume of 1.53 billion shares. On the Nasdaq, advancers topped decliners eight to seven on volume of 2.31 billion shares.
Fuel prices: U.S. light crude oil for August delivery gained $5.60 to settle at $141.65 a barrel on the New York Mercantile Exchange.
The national average price for a gallon of regular unleaded gas fell to $4.104 after holding stead at a record $4.108 for three days straight, according to AAA. (Full story).
Other markets: In currency trading, the dollar fell versus the euro and rose against the yen.
In the bond market, Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.80% from 3.81% late Wednesday. Treasury prices and yields move in opposite directions.
COMEX gold for September delivery rose $13.40 to settle at $944.50 an ounce. 
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