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Stocks Dig Deep in Rebound

The Dow shrugs off subprime fears to bounce off midday lows.

Updated from 4:57 p.m. EST

Stocks looked into the abyss Wednesday before finding their courage.

After trading as low as 11,939.61 at around 1 p.m. EDT, the

Dow Jones Industrial Average

rebounded smartly to close up 57.44, or 0.5%, to 12,133.40. The

S&P 500

rose 9.22, or 0.7%, to 1387.17 after trading as low as 1364.14 intraday, and the

Nasdaq Composite

gained 21.17, or 0.9% to 2371.74 after trading as low as 2331.57.


Tuesday's intraday swoon, seemingly triggered by the Mortgage Bankers Association's report on fourth-quarter delinquencies, there was no obvious fundamental catalyst for Wednesday's midday bounce.

Some traders said the rebound stemmed from the anticipation of Friday's so-called quadruple witching, the simultaneous expiration of stock-index futures, stock-index options, stock options and single stock futures. Others credited reports of insider buying at

Thornburg Mortgage



Lehman Brothers'


effort to

assuage concerns about its subprime exposure as keys to restoring investor confidence, or at least dampening the negativity.

"You get these wild roller coaster rides up and down and the conjecture begins," says Michael Driscoll, senior manager director of listed trading at Bear Stearns. "Was there something fundamental when

the Dow was down 150?"

Reiterating a view expressed

here in January, Driscoll says the best explanation for Wednesday's intraday move is that volatility -- meaning big swings in both directions, not just market weakness -- is the watchword of 2007.

Suggesting "investors are getting accustomed to increased levels of volatility," the trader says it was "business as usual" even amid the market's intraday nadir. "I didn't feel

an increase in panic selling, bid-wanted, 'get me out' situations."

That said, the CBOE Market Volatility Index traded as high as 21.25 intraday, its highest level since June, while the put/call ratio was as high as 1.88. The VIX settled down by 0.3% to $17.80, but the put/call ratio was still a relatively high 1.64 as of 4 p.m., according to the

CBOE Web site.

Acknowledging it's easier to say "expect more volatility" than to actually live through it, Driscoll says 2007 is shaping up to be a "traders' type market vs. a buy-and-hold investors market. The game is going to go to the nimble."

Presumably, nimble buyers focused their firepower Wednesday afternoon on energy, technology and cyclical stocks, as well as recently battered financial and housing-related issues (see below for detail).

Stepping Back to Look Forward

Wednesday's rebound is bound to be deemed a "successful retest" of the early March lows by optimists.

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At their intraday lows, the major averages were below their early March lows of 12,039 for the Dow, 1374 for the S&P and 2340 for the Comp. Closing below those levels would have provided technical confirmation that last week's rebound was merely a break in the selling that began on Feb. 27, rather than the end thereof.


Tuesday, I noted how another 90% down day would prompt Lowry's Reports to rethink its prior view the recent selloff was a correction within a bull market.

Tuesday's drop "could be characterized as part of a test of the lows," Lowry's senior market strategist Richard Dickson wrote Wednesday morning. "Unfortunately, successful tests usually come on light volume, and

Tuesday's volume was not light, in addition to being heavily biased toward the downside."

Dickson continues: "A further drop to new lows on continued heavy selling pressure would be a clear warning of still lower prices to come."

That warning signal was avoided Wednesday, although bears will say the rebound did not have the same oomph as Tuesday's decline, echoing a critique of last week's rally.



trading, advancing stocks led decliners 19 to 13, and 64% of the 3.6 billion share total was to the upside. In Nasdaq trading, gainers led 8 to 7, while 73% of the 2.2 billion-share volume was of the upside variety.

Looking ahead, Thursday brings earnings from

Bear Stearns


and a slew of economic reports, including the producer price index, weekly jobless claims, and separate regional manufacturing surveys from the Federal Reserve banks of New York and Philadelphia.

In addition to unknown events and global markets' response to Wednesday's Wall Street comeback, any of the above has the potential to swing the sentiment pendulum back toward malaise or closer to euphoria.

Volatile times, indeed.

Stocks on the Move

The comeback's leadership suggests renewed faith in the economy, but the day's laggards included transportation stocks and retailers such as


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J.C. Penney

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. The Dow Transports slid 0.2% but did close about 100 points above their intraday low; the S&P Retail Index fell 0.4%.

Furthermore, housing and financials gained as Treasury yields rose -- the benchmark 10-year note fell 8/32, its yield rising to 4.53% -- suggesting Wednesday's gains were mainly technically or expiration-driven rather than fundamental.

As originally published, this story contained an error. Please see

Corrections and Clarifications .

Aaron L. Task is editor at large of In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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