Stocks End Higher in Volatile Session

Major indexes recovered from a last-hour selloff amid investor skepticism over the Fed's plan to ease the credit crunch

by David Bogoslaw

Major U.S. stock indexes ended higher on Wednesday, but not before swinging from an apparently euphoric response to Bernanke & Co.'s plan for more creative steps to ease the liquidity crisis to a reversal into negative territory on nervous thoughts that it may be too little too late to address widening contagion in the financial markets.

Through coordinated action with a handful of other central banks, the Federal Reserve will employ at least $64 billion in auctions and foreign exchange swaps to grease the wheels of the global financial system.

On Wednesday, the Dow Jones industrial average epitomized the whipsaw action we've come to expect from equity markets in recent months. The U.S. blue-chip benchmark swung nearly 400 points from an early 271-point gain to a 95-point loss at the start of the final hour of trading. But the dramatics weren't done: The Dow clawed its way back near the close to end 41.13 points, or 0.31%, higher at 13,473.90. The broader S&P 500 index rose 8.94 points, or 0.61%, to 1,486.59. The tech-heavy Nasdaq composite index gained 18.79 points, or 0.71%, to close at 2,671.14.

Equity indexes retreated from their highs amid questions about why the Fed waited until Wednesday to announce the plan, S&P MarketScope said. A senior Fed official said the plan was the result of weeks of work coordinated with other central banks, which wanted the announcement made when all banks were open. The official said the announcement had nothing to do with the negative reaction to the rate cuts on Tuesday, CNBC Business News reported. Selling into earlier strength of financial stocks also contributed to the pullback from the highs.

But some market observers refused to accept that explanation and that has the market heading into year-end with questions about the Fed and uncertainty about the economy, causing many portfolio managers to close their books for the year, S&P MarketScope said.

On the New York Stock Exchange, 17 stocks traded higher for every 13 that lost ground in a volatile session, while the ratio on the Nasdaq was 15 to 14 positive amid active trading. Financial stocks took another drubbing, led by Citigroup (C).

Although the market wanted to view the Fed's new plan as proof the central bank is on top of the credit issues, there's a growing realization it may be too late to reverse the spreading contagion of bad loans, restricted lending and damage to the U.S. economy, said Joe Battipaglia, a market strategist at Stifel Nicolaus. That, coupled with bad news about additional loan loss provisions from Bank of America (BAC) and Wachovia Corp. (WB) wiped out any lingering optimism and put stocks on the defensive, he said.

"This isn't just about subprime and subprime-related issues. It's about what's happening to lines of credit for prime borrowers and Alt-A buyers, what's happening to credit card balances," he said. "What you see happening here is a very fast-spreading contagion amongst all forms of credit related to the consumer that are turning bad at an accelerated rate."

From that perspective, market observers are equating the Fed's actions with those it's taken in prior times of severe distress, such as in the wake of 9/11, Battipaglia added. "They must mean that the situation is so dire that they would look at a coordinated way with other central banks to flood money into the global market."

Investors had dumped stocks Tuesday afternoon, frustrated that the Fed did not seem to be taking the credit crisis seriously enough with 25 basis-point cuts in the federal funds and discount rates. About a half hour before the start of Wednesday's trading, the Fed announced some innovative actions designed to ease the liquidity crunch.

The Fed said it's setting up a temporary Term Auction Facility that will allow the Fed to auction term funds to depository banks against the wide range of collateral that can be used to secure loans at the discount window.