Bruised but not bowed, bulls staged a rebound on Thursday and helped stocks stabilize in a volatile session suggesting investors aren't ready to give up on the market's rally.
The S&P 500 recovered off early lows triggered by deepening concerns that higher oil could stifle economic activity. Stocks hit their worst levels when Brent crude neared $120 a barrel on Libya's turmoil.
The S&P inversely tracked oil prices and a late-day drop in crude resulted in a corresponding recovery in equities. The index is down 2.7 percent for the week so far, but investors believe the market could regain its footing at this level.
The rebound suggests that there is still some buying support, said David Joy, chief market strategist at the Boston-based Columbia Management, which oversees $347 billion. Libya was a good reason to trigger a pullback, but I don't think anyone has changed their mind on the recovery because of this.
Trading volume has risen in the past few sessions, following a period of anemic action that saw stocks hit 30-month highs. The S&P is up 24 percent since the start of September. About 8.90 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's daily average of 8.47 billion.
Kenneth Fisher, a billionaire investor who oversees $41 billion at the Woodside, California-based Fisher Investments Inc, agreed that there was a base of support for equities.
People keep underestimating how strong the economy is right now, he said. The potential short-term hiccups are the kind of disruption that the economy can easily absorb.
Oil has risen about 12 percent over the past three sessions. The sharp rise has fueled worries about the impact of energy costs on economic activity.
Oil futures were at their highest since late August 2008 as the escalating problems in Libya disrupted supply. Brent rose near $120 in intraday trading though it later pulled back to $111.12 in a sell-off sparked by rumors that Libyan leader Muammar Gaddafi had been shot.
If oil or Brent go up to $120 per barrel and stay there, that would be cause for revisiting our expectations for how robust the recovery will be, Joy said. That seems to be the level where you have to start thinking about how to change your position.
The Dow Jones industrial average <.DJI> fell 37.28 points, or 0.31 percent, to 12,068.50. The Standard & Poor's 500 Index <.SPX> slipped 1.30 points, or 0.10 percent, to 1,306.10. The Nasdaq Composite Index <.IXIC> rose 14.91 points, or 0.55 percent, to 2,737.90.
The S&P broke through a trendline dating back to August that connected lows in late August with lows reached in late November. Selling accelerated after this line was broken, and the Dow momentarily dropped below 12,000 for the first time since February 3, though both rebounded.
Options activity suggested that some investors were still cautiously bullish in the long term. Investors have been selling high-flying stocks, but then using long-term call options (which profit if the stock rises).
There is now a newfound respect for risk, thanks to $100 oil, which has strategists repositioning, potentially raising some cash and using longer expiration options on stocks or indexes to participate on the upside, said Joe Cusick, senior market analyst at online brokerage optionsXpress.
Priceline.com Inc jumped 8.5 percent to $462.34 and kept the Nasdaq in positive territory after a number of brokerages raised their price targets on the stock. The online travel agency reported a larger-than-expected profit late Wednesday.
General Motors Co's earnings topped estimates, but the stock slid 4.5 percent to $33.02 on concerns about the pressure from rising oil.
In economic news, new U.S. claims for jobless aid fell last week, hinting at an improvement in the labor market, but declines in new home sales and orders for a range of factory goods in January showed the economy still faced headwinds.
About eight stocks rose for every seven that fell on the New York Stock Exchange while on the Nasdaq, almost eight rose for every five that fell.
(Reporting by Ryan Vlastelica; Additional reporting by Doris Frankel; Editing by Jan Paschal)