Blue Chips Battle Back

The Dow erases a 173-point loss.
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Updated from 4:04 p.m. EDT

A high-volume rally reversed steep losses in stocks late Thursday, as bulls finally surfaced in a market that has been beaten down by fears of recession and an activist

Fed

. Bank stocks led the rebound as bond yields fell.

After falling 173 points earlier, the

Dow Jones Industrial Average

closed up 7.92 points, or 0.07%, to 10,938.82, ending a string of four successive declines. The

S&P 500

, which fell to its lowest point of the year at 1235 earlier, finished up 1.78 points, or 0.14%, at 1257.93. The

Nasdaq

lost 6.48 points, or 0.3%, at 2145.32, although it was down 50 points in morning trading.

The Dow's turnaround was paced by gains in

3M

(MMM) - Get Report

,

Home Depot

(HD) - Get Report

and

McDonald's

(MCD) - Get Report

.

Procter & Gamble

(PG) - Get Report

, a source of strength all day after reiterating earnings guidance Wednesday, rose 2.8%.

The Philadelphia Bank Index rose 0.5% after spending most of the session underwater, while the S&P Retail index reversed early losses to end the session up 0.6%.

"Nothing changed today for buyers to really come in," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "We're still concerned with growth and interest rates, but there's a lot more volatility than we've seen. The rates on bonds are declining as excess money on the sidelines is being put to work."

The 10-year Treasury note rose 6/32 in price to yield 5%, and the dollar rose against the yen and euro. A move in the 10-year yield below the 5% fed funds rate has spurred fears of a recession in past sessions.

About 1.75 billion shares changed hands on the

New York Stock Exchange

, with decliners outpacing advancers by a 9-to-7 margin. Meanwhile, volume on the Nasdaq was higher than usual, with nearly 3 billion shares changing hands. Decliners beat advancers 3 to 2.

Crude oil prices fell on news that Abu Musab al-Zarqawi, Iraq's top terrorist, was killed in a bombing north of Baghdad. In Nymex floor trading, crude for July delivery closed down 47 cents to $70.35 a barrel. Gold closed down $18.70 to $613.80 an ounce, silver gave up 81 cents to $11.07 an ounce, and copper fell 22 cents to $3.35 a pound.

Big turnarounds occurred in many resource stocks, including

Exxon Mobil

(XOM) - Get Report

, which reversed a $1 loss to close up 75 cents at $59.57, and

Alcoa

(AA) - Get Report

, which went from down $1.50 to roughly even at the close.

Declines in commodity markets were previously taken as bullish for stocks, but not of late. During a week in which the Dow has shed 2.7%, the S&P 500 2.4% and the Nasdaq 3.3%, the Amex Oil Index is down 5.3% and the Philadelphia Oil Services Index has swooned 7.8%. Selling in each index was sparked Monday when Fed Chairman Ben Bernanke turned up his anti-inflationary rhetoric.

"Bernanke is looking to force speculators out of commodities like gold and oil, as they're the ones keeping those prices higher," Mendelsohn said. "Bernanke could keep raising rates to bring inflation under control but also to make it painful for these speculators, which is why there's a shift out of commodity-based sectors to defensive plays."

To view Gregg Greenberg's video take on today's market, click here

.

Behind this week's slide has been a series of hawkish speeches from Federal Reserve members, starting with Bernanke, who said Monday that core inflation is "at or above" an acceptable ceiling. The sentiment was echoed Tuesday by Fed members William Poole and Susan Bies, and then expanded upon yesterday when Atlanta Fed president Jack Guynn noted that he's still waiting for energy prices to seep into the broader economy.

Fed Governor Donald Kohn joined in the chorus Thursday, saying that recent inflation data stemming from energy prices should be viewed as troubling. His comments came as the European Central Bank raised its benchmark interest rate by a quarter-point to 2.75%, while South Korean and Turkey also tightened.

"The recent decline in oil hasn't yet helped the market, as we're still hung up on what the Fed will do," said Al Goldman, chief market strategist with A.G. Edwards. "Oil companies can still make profits with oil at $45 a barrel, so it's not the fear of profits falling apart. Bernanke does not want to look dovish about inflation, even if it risks hurting the economy. However, we need to know if this will precipitate a soft landing or a recession."

Hyman said, "The unanimous Fed tough talk is putting further rate hikes on the table past the June meeting, which the market was not prepared for."

On the economic docket, the Labor Department said that weekly jobless claims fell 35,000, to 302,000. The less-volatile four-week moving average dropped 5,750 to 327,750. Meanwhile, the Commerce Department said April wholesale inventories unexpectedly rose 0.9% as March sales were up 1.3%.

Late Wednesday, Procter & Gamble repeated that it expects to earn 52 cents to 54 cents a share in the fourth quarter. The Thomson First Call consensus is for 54 cents a share. The company also reiterated a sales growth estimate of 20% to 24%. P&G shares are down more than 10% since early March on concerns about rising raw-materials costs. Shares gained $1.50, or 2.8%, to $54.74.

Chip-equipment maker

Novellus

(NVLS)

said late Wednesday that second-quarter earnings should be 37 cents to 40 cents a share, well above its old estimate of 26 cents to 28 cents a share. It cited better-than-expected sales and widening margins. Novellus was higher by $1.71, or 7.6%, to close at $24.16.

Tech bulls hope the outlook can breathe life back into the semiconductor sector, where

Texas Instruments

(TXN) - Get Report

is down 10.5%,

Applied Materials

(AMAT) - Get Report

has lost 10.5% and

Intel

(INTC) - Get Report

is off 14% since the Fed's last rate announcement.

Texas Instruments provided a midquarter update after the bell Thursday. Meanwhile, Citigroup lowered its earnings estimate for Intel and

Advanced Micro Devices

(AMD) - Get Report

for this year and 2007. In addition, UBS cut its price target for Advanced Micro to $33.

Other companies making investor presentations Thursday include

Halliburton

(HAL) - Get Report

and

Computer Associates

(CA) - Get Report

.

General Motors

(GM) - Get Report

reportedly is nearing a plan under which it and supplier Delphi will offer many of Delphi's workers buyout offers of up to $140,000. A deal could be announced next week,

The Wall Street Journal

says. GM slid 16 cents, or 0.6%, to $24.83.

In other earnings,

BMC Software

(BMC)

posted a fiscal fourth-quarter profit of $66.4 million, or 31 cents a share, nearly quadrupling year-ago results. Excluding items, the company earned 35 cents a share, beating the Thomson First Call consensus of 29 cents a share. However, shares lost 36 cents, or 1.6%, to $21.99.

Among ratings moves, Lehman Brothers initiated coverage of

Lexmark

(LXK)

with an equal weight rating and a stock price target of $58. Shares overcame early weakness and added 17 cents, or 0.3%, to close at $54.68.

Overseas markets were sharply lower Thursday. In London, the FTSE 100 fell 2.5% to 5562 and Germany's Xetra DAX lost 2.9% to 5383. In Asia, Japan's Nikkei sank 3.1% to 14,633, and Hong Kong's Hang Seng lost 2.3% to 15,450.