Greenspan Warns, Stocks Rally

Updated from 4:11 p.m. EDT

While Federal Reserve Chairman Alan Greenspan said that Isaac Newton's basic law of physics also applies to asset prices, the stock market chose to defy gravity in the last hour of trading Tuesday.

"History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets," Greenspan said; his comments seemed to spur a 45-point jump in the Dow Jones Industrial Average.

It wasn't so much what the Fed chairman said as what he didn't say, which was anything new, that proved a relief for the market.

"There was nothing surprising in the speech," says Owen Fitzpatrick, head of U.S. equities at Deutsche Bank. "That opened the door for a late buying opportunity."

But the afternoon bounce proved short-lived, appropriate for a session in which major averages struggled to find direction. The Dow closed up 0.12% to 10,456.21 after trading as low as 10,416.62 and as high as 10,496.25 intraday. The S&P 500 rose a fraction to 1215.66 while the Nasdaq Composite dipped 0.24% to 2116.42. The benchmark 10-year Treasury rose 1/32 to yield 4.29%.

Despite the Dow's and S&P's gains, declining stocks led advancers 19 to 14 in Big Board trading, where 1.9 billion shares changed hands. Losers led 16 to 13 in over-the-counter trading, where 1.65 billion shares traded.

While steering clear of any direct comments on the impact of Hurricane Katrina, Greenspan reiterated the Fed's faith in the ability of the economy to weather shocks -- such as the bursting of the tech bubble or the more recent surge in energy prices -- "reasonably well."

A slew of Fed officials -- it was San Francisco Fed President Janet Yellen's turn Tuesday -- have already hammered away that they expect Katrina's impact on the economy to be temporary, and that the central bank's main priority remains fighting inflation.