A slide in oil prices made room for a late turnaround in the stock market Wednesday, with the major indices closing modestly in positive territory after being hamstrung earlier in the day by continued jitters over rate hikes and credit quality.

The price of crude oil for June delivery finished lower by $1.62, or 3%, at $50.45 per barrel in Nymex trading after the government reported another rise in inventories.

The

Dow Jones Industrial Average

bounced off a low of 10,184 to finish up 19.14 points, or 0.19%, to 10,300.25. The

S&P 500

added 4.89 points, or 0.42%, to finish at 1171.11, after touching a low of 1158. The

Nasdaq Composite

added 8.78 points, or 0.45%, to 1971.55, off a low of 1943.

Still, advancing issues barely outpaced decliners 9 to 7 on the

NYSE

on light volume of 1.4 billion shares. There was heavier volume on the Nasdaq, where 1.7 billion shares traded, but decliners slightly outpaced gainers by 15 to 14.

Investors stayed in the trenches early Wednesday, ignoring news of a narrower-than-expected trade deficit. A false alarm that led to the evacuation of Capitol Hill and the White House also had contributed to overall nervousness at midday. So did St. Louis Fed President William Poole, who said in a speech the the FOMC "is prepared, if necessary, to move more aggressively to preserve the relatively low rate of core inflation that now exists."

The midday negativity also reflected continued unease about Tuesday's rumors that hedge funds may be in trouble after taking the wrong side of trades in

General Motors

(GM) - Get Report

stocks and bonds.

Two hedge funds that were mentioned specifically by name, QVT Financial and London-based GLG Partners, denied the rumors.

Deutsche Bank

(DB) - Get Report

, rumored to have lent the money to GLG, fell 3.3% Tuesday but its shares came back 0.8% on Wednesday.

Looking more closely at the situation, it seems that what originally sparked the rumors was a Standard & Poor's downgrade of the credit ratings on several collateralized-debt obligations (CDOs) sold by Deutsche Bank. The story isn't over but it could be that traders heard rumors of hedge fund selling and assumed GM was the catalyst, and (frankly) it's easier for journalists to explain GM's woes than complicated derivatives such as CDOs, for which there are no public markets.

CDOs are bundled packages of corporate debt with varying risk and yields. Many of these CDOs are bought by the same hedge funds and trading desks that likely held high-yielding GM debt.

TheStreet Recommends

The hedge fund story may not be a full-blown fire but there still may be reasons for concern.

Over the past two months, since GM first issued a profit warning and its debt was downgraded, tremors in credit markets have grown louder. Given that the bets made by hedge funds and others include leveraged money, covering losing positions often creates disproportionate reactions.

As noted by

RealMoney.com

contributor Jim Altucher,

many hedge funds took hits in April, squeezed between rising short-term rates and volatility in the corporate bond market after GM's March downgrade.

The "credit contagion" has also spread to Europe, according to Citigroup's London analysts. Over the past two months, credit spreads between European triple-B corporate issues and bunds have blown out from 30 basis points to 90 basis points. "That's almost two years of convergence reversed in just two months," writes Citigroup European strategist Darren Brooks. "The sudden change in correlations could be fatal for some hedge funds."

Credit Floodgates Still Wide Open

In the U.S. meanwhile, many still fear the

Fed's

track record of creating bubbles that end with one financial disaster or another when interest rates come up. And as Fed Chairman Alan Greenspan likes to say, we can only know for sure if it was a bubble after it bursts.

Meanwhile, credit availability still seems plentiful, even as credit spreads keep widening. The Fed's senior loan officer survey showed fewer banks were tightening credit standards when offering loans to commercial and industrial borrowers in the second quarter than in the first quarter.

"At least in the banking sector, credit availability is higher than at any other time in the past 15 years," writes Goldman Sachs analyst Jan Hatzius, who expects the trend will encourage sturdy capital spending this year.

And of course, there's still housing. On Tuesday,

Toll Brothers

(TOL) - Get Report

said strong demand for luxury homes boosted its homebuilding contracts and backlog to the highest levels in its history for the second quarter. The average home price it sold jumped to $693,000 from $616,600. Toll gained 1.4% and the Philadelphia housing sector index rose 0.75% Wednesday.

Many explain this trend as the last home-buying rush before interest rates seriously start rising. Of course, the market's been waiting for a while, as a now familiar conundrum is keeping the yield of the 10-year bond, used to set mortgage rates, at historic lows.

On Wednesday, the bond market first rallied amid the early rush out of corporate bonds and equities. But after equities made a comeback in afternoon trade, the 10-year Treasury bond finished virtually unchanged, with its yield still at 4.20%.

Still, it showed little reaction to strong economic news this morning. The U.S. trade deficit unexpectedly narrowed to $55 billion in March from its record level of $61 billion in February. The narrower deficit will likely lead to upwards revision of first-quarter growth forecasts. But the narrower deficit was not greeted by investors, except maybe by those with long dollar positions.

The market is still concerned about growth going forward. And with reason. Could it be that the impact of surging oil prices, for the same reason that it slowed U.S. consumer spending and apparently reduced imports, also held back growth of foreign exports?

One of the reasons for the dip in crude oil prices Wednesday was that the International Energy Agency's monthly report showed that weakening economic growth has slowed global demand for oil in the first quarter. For the year, IEA expects oil-demand growth for 2005 will decrease to 2.2% from 3.4% in 2004.

The release of April retail sales figures on Thursday may provide more clues. The market expects sales to rise 0.7% compared with a 0.3% gain in March.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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