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Updated from 4:09 p.m. ET to reflect closing market prices.



) -- The recent volatility in stocks is such that even a bearish firm feels the need to say the world isn't ending.


For now we think the economy is more likely to remain in a rut than fall into a recession despite the financial market upheaval," writes

Capital Economics

, in a research note on Tuesday. "Accordingly, we do not expect to see a total meltdown in share prices and have decided to revise our end-year forecast for the

S&P 500

only to 1,000, which would represent a further drop of just over 10% from Monday's closing level."

Tuesday's session saw huge swings as investors are struggling to balance how quickly stocks have come down and whether or not they are oversold against real concerns about where the economy is heading. This afternoon's statement from the

Federal Reserve's

open market committee triggered seesaw action right up until the close as the central bank pledged to keep near-zero interest levels through at least mid-2013 but gave a dour view of the economy and no concrete indication that


is on the way anytime soon.


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Dow Jones Industrial Average

ranged more than 600 points before finally making a strong push back above 11,000. The blue-chip index finished the session at 11,239, erasing two-thirds of Monday's historic decline. The


traveled nearly 150 points from trough to peak, and delivered a robust 5%-plus gain to settle at 2482. The

S&P 500's

range of 70 or so points is more than 6% fluctuation based on its closing level of 1173. The index roared back 4.7% to close at 1172.

Prior to the heavy selling of the past few days, the

S&P 500

had been above 1200 since December 2010, so

Capital Economics

has some reason to gloat. The firm is still very much a bear, estimating that if the economy does slip into recession, the

S&P 500

could tumble to as low as 850, and saying it's difficult to find a positive catalyst for equities beyond the fact that they've fallen so far so fast.

"An economy in a rut would have a less detrimental impact on stock prices than one in recession, but it would hardly be good news," the firm says. "Investors would be unlikely to ramp up their expectations of earnings growth or to take on more risk, especially with all the problems still plaguing Europe."

Capital Economics

also doesn't see how the

Federal Reserve

will be able to ride to the rescue with more fiscal stimulus like it did last year because inflation has bumped higher.


investors would also be mindful that US policymakers are running out of ammunition," the firm says. "Fiscal expansion is no longer realistic - indeed a tightening of the public purse strings will constrain growth beyond 2012 - while the hurdle for another bout of quantitative easing (QE) is higher given recent upward pressure on core inflation."

Birinyi Associates is taking a different tack and sticking to its bull stance. The firm argues that much of the current selling pressure is the result of political problems, rather than financial ones.

"Political elements create emotion and emotion is the mother of volatility," the firm says in commentary released on Tuesday. "If the decline were purely a result of financial, we would have greater concerns. (Having said this we recognize that


(AAPL) - Get Apple Inc. Report

is, nonetheless, down 10% in ten trading days as selling is selling.)"

The drop has made the firm's mid-2012 target of 1450 look a "bit shaky," Birinyi admits, but it maintains that its belief that a "rational and disciplined" portfolio can still attain a 10%-plus return for 2011 is solid.

Saying the pessimism in the market is overdone, Birinyi pointed to both Apple and


as examples of companies that are still thriving.

"Priceline's earnings, coming as they did after the first 500 point day in several years was not only a positive but also suggestive of a better economy," the firm says. "The company had revenue growth of 36% in the second quarter of 2011 vs the first quarter which represents real people spending real money on real things. This was not accounting or buybacks but real commerce. Apple apparently has inventory problems in that it has no inventory."

Two very different views of what kind of shape the market is in that go some way toward explaining why it's so difficult to get a bead on where stocks head from here. That's got Wall Street laser-focused on the


, Wall Street's so-called fear gauge, which is derived from options activity in the

S&P 500


RDQ Economics

pointed out in research late Monday, the VIX, whose history goes back to 1986, has only responded like this in two other instances, the March 2009 stock-market bottom of the recent financial crisis and the crash in October 1987. The higher the VIX runs, the higher the fear in the marketplace.

The VIX settled below 20 as recently as July 25, and was below 24 last Wednesday. It closed Monday at its session-high of 48, a level unseen since last May during the first round of the Greek debt crisis. Tuesday the VIX was declining more than 15% but still sat above 40.

The question now, as far as


is concerned is whether or not the current distress in the market is warranted.

"Markets are often at their riskiest when complacency is high and the markets have been rising, and the greatest opportunities present themselves when fear is high and the market has fallen sharply," the firm writes. "One of the greatest mistakes that investors can make is to capitulate in market conditions like those of the last two weeks (can no longer take the pain) since this locks in the loss."


view is that the selling is a product of panic driven by the downgrade of the United States' credit rating by Standard & Poor's, not any fundamental change in market conditions. Basically, investors sprinted to exit riskier assets, namely stocks, simply because they are so afraid of the uncertainty being nurtured by landmark events, like the first-ever downgrade of U.S. debt and the federal government coming so close to default.

"A downgrade that clearly does not deter investors from fleeing into Treasuries to protect themselves from the market mayhem," the firm writes. "In the Alice Through the Looking Glass logic of risk on/risk off herd behavior, we have investors rushing toward the downgraded asset. Truly bizarre but entirely logical (to the Mad Hatter at least!)."

That leaves


looking for an entry point.

"We stand by our view that corporate profits will rise by 8%-10% this year and, therefore, equities are considerably more attractive than they were last Friday," the firm writes. "It may be a rough ride but the market has already almost discounted a recession."

Which brings the question of valuation to the fore. Early Monday, the upgrades were rolling in for many individual stocks with near boilerplate language about the shares now at attractive levels following the recent price decline. Individual picks, of course, will make all the difference, as well as where purchases are made.


sees a real opportunity.

"We do not see the economy falling into recession and we think that the unlevered, patient investor will reap significant rewards from scaling into the equity market during this period of extreme market tension," the firm says.

One thing is certain: People are trading. Volume has come back in a big way. The New York Stock Exchange saw nearly 9 billion shares change hands on Tuesday, while the Nasdaq reached 3.4 billion. For much of the rally since QE2 was announced last November, the lack of volume was bemoaned by bears with NYSE volume of less than 2 billion about the norm. Whatever moves the indexes are making now, they've got the churn to back them up.


Written by Michael Baron in New York.

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