A pullback that was widely expected and often hailed as "healthy" took a sickly turn midday Tuesday after flagging consumer confidence helped push stocks sharply lower. But as has been the case more often than not lately, major indices made a remarkable late recovery and ended well out of the danger zone.

Early on, the

S&P 500

broke solidly below support at its 50-day moving average of 873, which was troubling from a technical perspective. Less publicized but equally significant, the U.S. Dollar Index also moved below important support at 107.44, which it marginally breached on Monday.

But as was the case twice last week, the S&P 500 bounced smartly from that 873 level and the entire market lifted dramatically in the final 90 minutes of trading.

After trading as low as 867.91, the S&P closed off 0.9% to 882.15 while the

Nasdaq Composite

lost 1.2% to 1300.50 after trading as low as 1279.20. The

Dow Jones Industrial Average

, meanwhile, closed up fractionally to 8368.94 vs. its intraday low of 8198.04. Like the S&P, the Dow penetrated below its 50-day moving average, around 8240, before recovering.

The Dow got its biggest boost from

Procter & Gamble

(PG) - Get Report

, which recouped the prior day's decline after reporting upbeat third-quarter results.

ExxonMobil

(XOM) - Get Report

was the biggest drag on the Dow amid overall weakness in energy shares after

BP

(BP) - Get Report

cut its production forecasts for the third time this year. BP fell 6.8% and the Amex Oil & Gas Index lost 2.6%.

Major averages also were restrained by weakness in semiconductor and related stocks, which regurgitated some of their recent gains. The Philadelphia Stock Exchange Semiconductor Index fell 3.1%.

The fundamental trigger for the decline in both U.S. equities and the dollar was the steep drop in the Conference Board's consumer confidence index for October. The index fell to 79.4 from 93.7 in September, its biggest monthly decline since September 2001 and well in excess of the drop to 90 forecast by economists. Consumer confidence, as measured by the Conference Board, is now at its lowest level since November 1993.

Separately, both the Bank of Tokyo-Mitsubishi/UBS Warburg and Redbook surveys of retail sales showed sharp contraction for the third week of October.

Even the equity market's recovery couldn't take the shine off the Treasury market's rally following the weak economic news. The price of the benchmark 10-year Treasury note rose 1 7/32 to 103 17/32, its biggest rally since Sept. 3, its yield sinking to 3.93%. Meanwhile, the Dollar Index settled down 0.5 to 107.29 after having traded as low as 107.05.

The confidence report, and resulting market action, reconfirmed already-growing suspicions that the

Federal Reserve

is likely to lower interest rates at its policy meeting on Nov. 6. Such expectations had risen dramatically in recent days after a series of articles in influential financial news outlets pointed to such an outcome. On Tuesday, the fed funds futures were pricing in more than 80% odds of a 25-basis-point rate cut next week vs. odds of under 10% late last week.

"To anticipate a rate cut in the not-too-distant future makes sense

but futures markets are speculative arenas and not always an accurate barometer of where Fed policy is headed," said William Sullivan, senior economist at Morgan Stanley, recalling that fed funds futures were pricing in the potential for a series of rate hikes this year in March/April.

The consumer confidence report is "an important set of data" but doesn't guarantee a rate cut next week, Sullivan said, noting there is often a "disconnect" between such surveys and actual consumer spending. "We did move down to near-recessionary levels

in consumer confidence but I think you need to see especially weak performance in the ISM survey and employment situation" on Friday before a rate cut on Nov. 6 is assured.

Nevertheless, heightened anticipation of a Fed rate cut was attributed by many as the catalyst for the stock market's abrupt about-face Tuesday afternoon. Other issues cited by traders included reports that an explosion of a

FedEx

(FDX) - Get Report

truck was not a terrorism-related event, and the favorable settlement of a lawsuit against

Masco

(MAS) - Get Report

, which rose 3.3%.

Another possibility is that mutual funds, eyeing Thursday's fiscal year-end, were actively buying shares Tuesday in order to support the market.

Technically speaking, a move below 873 would have left the S&P 500 vulnerable to revisiting its Oct. 9 closing lows of around 776 if the next near-term support level around 855 had been breached. In addition to their fiscal year-end consideration, incentives were high for mutual funds to prevent such a development, as they are desperate to see a strong fourth quarter to stop the tide of redemptions.

"These guys are dying -- obviously their performance has not been good for the last couple of years," said Bob Basel, director of listed trading at Salomon Smith Barney. "You may see a little marking-up starting now, and it'll be a factor for the next couple of days."

With the three-day settlement rule, Tuesday is the last trading day in the current fiscal year for most funds. However, Basel observed that funds can attempt to secure a better closing price for their holdings by buying shares of names they already own, even if their fiscal year and month-end portfolios don't reflect the additional number of shares acquired.

This is commonly known as "marking up" positions and/or "window dressing," and is one element of the 1990s bubble era that doesn't seem to have been eradicated by the bear market.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.