Stocks’ stunning turnabout gives hope to investors

Have we hit bottom?

Abject panic in financial markets worldwide Thursday gave way to a dramatic turnaround in U.S. stock prices, raising hopes that the selling wave might have crested for now.

The Dow Jones industrial average fell as much as 344 points early in the session, then skyrocketed to close off just 15.69 points, or 0.1%, at 12,845.78.

The broader market also rebounded as the number of shares changing hands on the New York Stock Exchange and the Nasdaq Stock Market reached record levels.

Stocks have crumbled in recent weeks amid mounting worries about the health of the U.S. financial system, which has been rocked by rising mortgage defaults and sinking home prices.

The Dow is down 8.2% from its record close of 14,000.41 on July 19 and has swung wildly in the last four weeks, closing up or down in triple digits on 12 of 19 trading days.

Many analysts have been waiting for a so-called capitulation day -- a session when fear ruled and trading volume went off the charts.

Massive unloading of stocks and deep pessimism about the future often are signs that a market downturn is coming to at least a temporary halt.

Thursday may have fit the capitulation bill, some Wall Street veterans said.

“It looked like the world was coming to an end,” said Jason Trennert, a principal at investment research firm Strategas Research Partners in New York.

In a day that was momentous even in the context of the many extraordinary market moves of recent weeks, overseas stocks had plummeted overnight, in part taking their cue from Wall Street’s sharp sell-off on Wednesday.

The South Korean stock market sank 6.9%, Turkish stocks tumbled 6.8% and the British market fell 4.1%.

What’s more, investors were selling other assets besides stocks. Gold and other commodities plunged, for example. “People are selling whatever they can sell,” Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald in New York, said early in the day.

For a second day, concerns about a serious credit crunch in the U.S. financial system centered on Calabasas-based Countrywide Financial Corp., the nation’s largest mortgage lender.

Countrywide said it borrowed the entire $11.5 billion available on a bank credit line, which investors took as a sign that the company was being shut off from borrowing via other sources. And savers lined up at some of the firm’s bank branches to pull their money out.

In a frightening plunge for a major stock, Countrywide’s shares fell as low as $15 from $21.29 at Wednesday’s close. But then buyers suddenly poured in, lifting the stock to $18.95 by the close of trading.

That happened across the stock market. The Dow bottomed at around 10 a.m. PDT, then shot higher.

At the lows for the day, nearly all major U.S. indexes were down more than 10% from their recent highs, marking the deepest setback for the market in more than four years.

That may have rung a bell with investors: Historically, a 10% drop is considered a normal “correction,” or short-term pullback in an ongoing bull market.

Some analysts said investors began to bargain-hunt on the assumption that the Federal Reserve was close to cutting short-term interest rates to buttress the financial system. The Fed again on Thursday pumped money into the banking system to try and encourage lenders to keep money flowing.

Financial stocks helped lead the market recovery. JP Morgan Chase jumped $2.47 to $45.47 and Citigroup rallied $1.94 to $47.55.

One of the buyers in the stock market Thursday was Brian Barish, head of Cambiar Investors, a $10-billion money manager in Denver.

“I’m going with the assumption that we’re getting close to the bottom,” Barish said. Many of the classic signals of a bottom are present, he said.

Investors in stock mutual funds pulled a record $19.9 billion from the portfolios in the week ended Wednesday, according to TrimTabs Investment Research. Major outflows from stock funds often are signals of maximum stress on investors’ psyches -- which, perversely, can indicate that the selling is peaking.

Barish said he was buying shares of companies such as Pasadena-based Avery Dennison Corp., which makes adhesive labels and other office products. The stock fell as low as $54.51 and closed at $56.80, down $1.13. “It’s been pounded mercilessly in recent weeks,” from $68 in mid-July, Barish said.

Another investor who said he was shopping for bargains was John Buckingham, head of Al Frank Asset Management in Laguna Beach. “When stocks go on sale, that’s when it make sense to buy even though it’s emotionally hard to do,” he said.

Many market optimists say they’re making two main assumptions. One is that the Federal Reserve will begin cutting interest rates this fall to strengthen the financial system and boost investors’ confidence.

“We think they will ease by the end of the year,” Strategas’ Trennert said.

The other assumption is that the domestic economy will continue to grow, despite recent signs that consumers are pulling back on their spending. If the economy were to weaken significantly, corporate earnings could slump, removing a crucial pillar of support for share prices.

Some Wall Street pros said it was far from certain that stocks were bottoming out. They noted that the sinking housing market -- the root cause of the financial system’s turmoil this summer, as mortgage delinquencies soar -- wasn’t likely to recover any time soon.

And more hedge funds and other big-money players could wind up failing, putting further pressure on securities as assets are liquidated.

“I would rather err on the side of being late [to buy stocks] than being too early,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Foreign stocks, which have fallen more than the U.S. market, may be more appealing for investors looking to put money to work, Ablin said. Even as the domestic economy has slowed over the last year, growth in the rest of the world has been robust.

At Thursday’s close, the South Korean market index was down 15.6% from its recent record high. The Mexican market, which sank 1.2% Thursday, is down 14.2% from its recent peak. The British market is off 13% from its recent high.

By contrast, the New York Stock Exchange composite issue of all stocks on the exchange is down 11.1% from the all-time high reached July 13.

John Kornitzer, head of Kornitzer Capital Management in Shawnee Mission, Kan., said he expected the housing and mortgage troubles to produce more blow-ups among firms in those businesses. That will keep the stock market volatile, he said.

“You just don’t know who’s going to be next,” he said. In that environment, stock indexes are likely to fall further as investors grow more cautious, so it’s too early to load up on shares, he said.

“I’m biding my time,” Kornitzer said.

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tom.petruno@latimes.com

josh.friedman@latimes.com