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Late Rally Falls Just Short

Updated from 2 p.m.

It's easier to buy a correction than a mere dip.

The major stock market indices finally have had their long-awaited correction, marking a 10% decline from recent highs. And given that it's been four years since stocks have seen a move like this, some investors are feeling relieved.

Thursday's early selling brought the level of panic in the markets to new heights. The flight to quality trade is on in short-term Treasury bonds, as hedge funds liquidate stocks indiscriminately to meet investors' redemptions requests. The carnage is no longer at the margin or focused mostly on risky assets -- and that made Thursday an easier moment to be a buyer.

After falling as much as 343 points around midday, the Dow Jones Industrial Average stormed back in the last hour of trading to close down just 15 points. The S&P 500 briefly fell through its March low of 1374.12 before recovering to trade around 1400.

James Paulsen, chief investment officer at Wells Capital Management, says he added to his allocation to the financial sector this week. So far that's paying off. The Amex Securities Broker Dealer Index was rising Thursday even while the broader market was enduring a selloff. Paulsen is also bullish on cyclical industrials and basic materials sectors, which are also victims of the panic selling.

Still, a wild last hour that lapsed into selling before giving way to a late rally pointed out the risks that coming days will see more forced selling.

"If these guys [hedge funds] need to raise money, they can't sell their subprime loan paper," says Marc Pado, chief market analyst at Cantor Fitzgerald. "They sell what's liquid."

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