Stocks staged a furious late-day rally on Tuesday to push the S&P 500 into positive territory as the focus shifted from European debt woes to buying after shares hit six-month lows.
Major U.S. indexes had fallen more than 3 percent early in the session on growing questions about the stability of the European banking system after a small Spanish bank failed over the weekend.
It's a selling climax. This has all the looks to me of a capitulation, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.
Equities have been under nearly constant selling pressure the last few weeks. The morning's action reflected the market's nervousness as the S&P 500 fell through the May 6 flash crash level to its lowest level since early November 2009, down 14.5 percent from its late April closing high.
Today is one of those days where the market stops and thinks maybe we have sold too much, maybe we have priced in Europe too much, said John Canally, investment strategist and economist for LPL Financial in Boston.
People are beginning to realize that there can't be a silver bullet that can instantly fix this problem.
Strategists linked the rebound in stocks to strengthening in the euro. The single currency earlier fell to an 8 1/2-year low against the yen and approached a 4-year low versus the dollar, while safe-haven U.S. Treasuries rallied.
The Dow Jones industrial average <.DJI> dropped 22.82 points, or 0.23 percent, to 10,043.75. But the Standard & Poor's 500 Index <.SPX> gained just 0.38 point, or 0.04 percent, to end at 1,074.03. The Nasdaq Composite Index <.IXIC> shed 2.60 points, or 0.12 percent, to 2,210.95.
The euro's strength has been a proxy for risk appetite and confidence in the euro-zone economy.
European markets fell to their lowest level in nearly nine months while the Libor three-month dollar rate rose to the highest level since July. The Spanish government's rescue of a local bank over the weekend made banks leery of lending to European institutions. Rising Libor rates raise banks' funding costs.
Shares of materials companies and retailers were among the top performers, with the S&P Materials Index <.GSPM> up 1.6 percent and the S&P Retail Index <.RLX> finishing up 1.4 percent.
AK Steel jumped 11.4 percent to $15.06 after a Citigroup upgrade while AutoZone Inc advanced 5.6 percent to $194.57 after posting third-quarter earnings.
Earlier, the three major U.S. stock indexes had fallen about 3 percent to session lows.
VIX DROPS AS VOLUME JUMPS
The CBOE Volatility Index <.VIX> or VIX, known as Wall Street's fear gauge, fell 9.7 percent to 34.61 after reaching an earlier high of 43.74 -- a gain of 14.1 percent.
U.S. consumer confidence rose for the third straight month in May to the highest in more than two years. But that was countered by a report showing single-family home prices dropping in the first quarter on renewed price pressure as federal aid faded away.
Volume was strong with about 13.06 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq -- well above last year's estimated daily average of 9.65 billion.
Declining stocks outnumbered advancing ones by a ratio of almost 2 to 1 on both the New York Stock Exchange and the Nasdaq.
(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)