Shrill Winds Start Market Downdraft

But the averages snap back as volatility rules Wall Street.
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Updated from 12:55 p.m. EDT

A phalanx of downbeat economic data paused the market's forward march Wednesday, sending stocks swinging lower as investors locked in profits. By mid-afternoon, however, buyers had jumped back in and the ascent resumed.

The ride began when the Commerce Department reported its durable goods numbers for September, showing orders for big-ticket items tumbled to their lowest level in more than five years. The orders fell by 8.5% to $165.44 billion, far more sharply than expected, fueled by a drop in aircraft orders since Sept. 11.

"That's what's moving the market," said Dan Ament, associate vice president and investment executive at Dain Rauscher, early in the session. He noted that in comparison, earnings season has been "beating or meeting" the Street's expectations.

The major averages plummeted on the report, with economically sensitive stocks, including tech outfits, leading the way down. But after going as much as 150 points lower, the

Dow Jones Industrial Average

fought back late and was recently 60 points higher at 9403 , while the

Nasdaq

was up 21 to 1752.

Investors had several high-profile downgrades to digest.

Oracle

(ORCL) - Get Report

, which was downgraded by Salomon Smith Barney this morning, was recently losing 7.1% to $13.61.

Juniper Networks

(JNPR) - Get Report

, downgraded by Morgan Stanley, fell 3.4% to $26.08. Chip-equipment makers, which rose Wednesday amid the latest book-to-bill ratio, were also moving down with the tide of selling.

More disappointment arose overseas when the European Central Bank decided not to lower interest rates at a regular meeting. "I think it helps investors, even here on our soil, to see a global, concerted effort to stimulate economic growth," said Ament. But the ECB, along with the

Federal Reserve

, is probably concerned about "the other side of an economic recovery -- inflation," he added.

On the housing front, September's existing home sales fell 11.7% in September to 4.89 million units, compared with a consensus estimate of 5.20 million. Separately, the newly unemployed grew in ranks with the latest jobless claims number rising by 8,000 to 504,000 last week, according to the Labor Department. The Labor Department also revised upward its count of claims for the previous week by 6,000. That raised the four-week average of claims by 12,000 to 505,000 -- the highest level since March 30, 1991. Employment costs also rose slightly in the third quarter.

A Rocky Ride

Wall Street has been rolling higher since hitting lows on Sept. 21. The Nasdaq has gained about 22% since then, as investors ventured from the safer defensive stocks into the tech sector. Reasons for confidence have crept in since September, said Peter Canelo, U.S. investment strategist at Morgan Stanley Dean Witter. Among them: monetary easing, economic stimulus and the latest weekly retail sales reports. With "a whole lot of stimulus, and with fiscal policy turned on big-time," Canelo said.

Going by today's swings, investors better have strong stomachs. "Rotation continues to be fierce," said Ament. "On weak days people are looking for defensive sectors, as the flight to quality still dominates psychology." But when they're comfortable with the outlook, Ament added, investors will naturally move into more growth-oriented sectors.

More volatility is close to inevitable. Several factors contribute to that, among them "window dressing" by mutual fund managers, whose fiscal year ends with October. "Investors in depressed stocks have to be aware that there's considerable overhead supply for people looking to book tax losses prior to year-end," Ament said.

Short Interest

And joining the jostling of profit-takers, "this market is probably driven by short-covering with professional investors making some longer-term commitments," said Phil Dow, Dain Rauscher's stock market strategist.

According to a report Wednesday, short interest in Nasdaq stocks fell for the first time in four months. It also dipped on the Big Board. "I don't think it means that the market has a conviction it's going to go higher," said Peter Boockvar, equity strategist at Miller Tabak. "I just think that when you see such a dramatic decline in such a short period of time, people have to cover their shorts."

What might short-sellers still be eyeing? "I think it's pretty much anything that's economically sensitive," said Boockvar, "since the economy continues to be weak and it looks like it's getting weaker."

"I'd advocate having the right balance in a portfolio to be able to weather the storm," said Ament. "It's going to be challenging."