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Stocks' big turnaround may leave bears wary

May 25, 2010 |  4:07 pm

Wall Street’s stunning reversal Tuesday ought to leave stock market bears with serious doubts about how much lower they can push share prices in the short term.

That’s the view of veteran trader Jon Najarian at in Chicago. He thinks the sell-off early Tuesday felt like the kind of classic capitulation that wrings out many of the market’s “weak hands,” or investors and traders who’ve been on the verge of bailing.

In another wild session, the Dow Jones industrial average initially plunged to a seven-month low of 9,774, a drop of 292 points, or 2.9%, from Monday’s finish. But a rally that began about two hours before the closing bell recouped nearly all of the day’s losses. The Dow ended down just 22.82 points, or 0.2%, at 10,043.75.

Broader market indexes also rebounded from deep losses to close either with small gains or small declines.

Bears The market has been extraordinarily volatile all month, of course, rocked by Europe’s debt woes and their threat to the global financial system, fear of potential fallout from Congress’ banking-regulation overhaul, and the risk of economic and environmental catastrophe from the massive Gulf of Mexico oil spill.

On Monday, something new entered the mix: the threat of war between North and South Korea. That sent Asian and European stock markets diving overnight. When Wall Street opened share prices immediately plummeted.

But the day’s lows were reached within the session’s first few minutes. Most significant, Najarian said, was that the Standard & Poor’s 500 index quickly bounced after falling to 1,040, which was just below its intraday low of 1,044 reached at the nadir of the market’s early-February sell-off.

The S&P finished with a gain of 0.38 of a point to 1,074.03.

“Once they got all the weak hands out [at the opening], it was over,” Najarian said.

Bearish traders, he said, now have to be wary about betting on another plunge in share prices soon, given the market’s ability to battle back on Tuesday.

“What more could the bears possibly throw at the market?” he said.

That may be tempting fate. But even Hong Kong money manager Marc Faber, a well-known pessimist on equities, said in a Bloomberg TV interview on Tuesday that the market had become “oversold” and could be set up for a near-term rally.

Some sidelined investors and traders obviously decided that stocks had fallen to attractive levels given the severity of the pullback in recent weeks. What had been a 10% decline in prices in the last two weeks, as measured from the market’s spring highs, by Tuesday morning had become a drop of 14% or more in broad indexes.

“You’re getting to where stocks are cheap,” Dave Rovelli, head of trading at brokerage Canaccord Adams in New York, said amid the day’s rout.

At its low Tuesday the S&P 500 index was off 14.5% from its spring closing peak of 1,217.28 reached on April 23.

The Russell 2,000 small-stock index’s low for the day marked a drop of 16.7% from its April high. The New York Stock Exchange composite was down 16.5% at Tuesday’s low from its spring high.

-- Tom Petruno

Photo: Grizzly bears, Axhi, left, and Jim, at the Brookfield Zoo in Chicago. Credit: M. Spencer Green / Associated Press