Dow rebounds late in day after 440-point drop

By Matt Krantz
USA Today

Trader Daniel Williams shows weariness on the floor of the New York Stock Exchange, where a dramatic selloff turned around in the last 90 minutes of trading. Associated Press

Ninety minutes before markets closed, it appeared the meltdown that so many feared had arrived. The Dow Jones industrial average was down 440 points, a six-session loss of more than 1,100 points that threatened to become the final major U.S. index to set a bear market low.

But by the closing bell, a stunning reversal had wiped out all but 45 points of the Dow's loss. The long-suffering Nasdaq composite actually closed with a gain.

As impressive as the recovery was, many analysts and traders said it didn't do much to dispel fears the bear will ravage stocks again. Investors remember all too well a 325-point rally on July 5 followed by triple-digit Dow losses in three of the next five sessions.

Nothing has been able to stop the slide, and investors have largely ignored signs the U.S. economy is on the mend. Even veteran market-watchers are at a loss to say what will end the decline.

"It's difficult to call the bottom, because most of the worries are psychological," said Ron Hill, partner at Brown Bros. Harriman.

Even with yesterday's bounce, the extent of the carnage has become startling:

• Since the faux July 5 rally, the Dow is down 740 points, 7.9 percent; the Standard & Poor's 500 is down 7.2 percent; and the Nasdaq is down 4.5 percent.
• Investors have lost $770 billion in stock value in the last six sessions.
• The Dow's 440-point plunge yesterday brought it within 9 points of the low it set Sept. 21.

Further back, and the picture is even worse. The Nasdaq is 73 percent below its 2000 peak. The Dow is 26 percent below its high. And the broader S&P 500, which yesterday set a bear market low, is nearly 40 percent below the record it set March 24, 2000.

Who was selling yesterday? Analysts said mutual funds and individual investors alike started selling when the market was collapsing.

Investors pulled $6.3 billion from stocks for the week ending July 10, according to TrimTabs.com.

At Charles Schwab, investors continue to shift money away from stock funds into bond and money market funds, said spokesman Mo Shafroth. "People are chasing fixed income."

Such sharp movements of money between stocks and money funds are a side effect of a market full of investors trained during the 1990s bull market, who have never seen a bear.

Larry Swedroe, research director at Buckingham Asset Management, said the chaos suggests most investors have abandoned their investment plans or failed to make them in the first place.

"People don't understand how risky and volatile the stock market is," Swedroe said.

Now investors are left to figure out what the wild day meant. Traders were hard-pressed to pin the turnaround on any single event, but said institutional investors and hedge funds were quick to pile in for fear of missing out on any gains. Even market pros are torn on whether yesterday was the inevitable bloodbath that ends a bear or if the pain will be suffered on a later day.

Bulls were encouraged by the scorched-earth selling that even took down stocks of home builders, among the last pillars of strength. Destruction of the sole survivors is a needed part of the bottoming process, said Sam Stovall, a market strategist at S&P. Unlimited panic selling is what many professionals take as a signal that all sellers have finally been flushed out.

Declining issues outnumbered advancers more than 7 to 3 on the New York Stock Exchange. Consolidated volume was relatively heavy at 2.4 billion shares, ahead of Friday's 1.92 billion.