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Poof! S&P 500 says goodbye to correction

Adam Shell
USA TODAY

Poof!

Traders work on the floor of the New York Stock Exchange on Feb 12, 2016.  (Photo by Andrew Burton/Getty Images)

Out of nowhere, a three-day rally on Wall Street has brought the S&P 500 index back from the brink of collapse, trimming its losses from its record high to less than 10% and pulling it out of correction territory.

What a difference three trading sessions make. Last Thursday at its intraday low, the Standard & Poor’s 500  was down more than 15% from its May 2015 peak and looked like it was on an eventual collision course with a bear market, or a drop of 20% or more. But a sudden, swift and sizable three-day surge has trimmed the large-company index’s loss from its high to a more manageable 9.6%, which allows it to exit from its painful early-year correction -- at least for now.

Winner! S&P 500 exits correction, Dow gains 257

U.S. stocks got off to their worst start ever to a year, dragged down by all sorts of fears -- some real, some imagined -- centered around the big three: plunging oil prices, angst related to the Federal Reserve’s interest rate hike plans and rising risk of a U.S. recession sparked by a slowdown in China, the world’s second-biggest economy.

But amid all the doom and gloom, a market said to be grossly oversold and a spike in pessimism reminiscent of the fear that engulfed Wall Street during the 2008 financial crisis, a rally was born. Wall Street is now debating whether the bottom is in or whether the rally is just a short-term pop in an ongoing down market.

What gave what looked like a dead market new life?

Here are some theories:

* Rationality returned.  Investors were exiting stocks en masse in a fit of panic with a herd mentality that led to a selling stampede. Fear trumped fundamentals (or actual business conditions on the ground). Some positive headlines on the U.S. economy and the oil patch, where talk of a production freeze has emerged, helped stem worse-case scenarios.

“Calmer heads have prevailed,” Brian Belski, chief investment strategist at BMO Capital Markets told USA TODAY. “The positive economic news this week helps defeat the fear mongers and naysayers that have positioned their portfolios for a U.S. recession. Investors should remain leery of excess negative banter in the marketplace, especially after the markets have gone down” so much.

* Recession fears faded. Investors were pricing in increased odds of recession, but good news Wednesday on inflation at the wholesale level and industrial production, sent a clear message that the economy was still in growth mode.

The better economic news “deflated the fear of U.S. recession quite a bit,”  says Bill Stone, chief investment strategist at PNC Asset Management.

* Oil roared back. When Saudi Arabia and Russia went public with a plan to freeze oil production levels this week, it was viewed as a first step toward price stability and a sign that key oil-producing nations were finally willing to act to address the supply glut.

That got Wall Street thinking a long elusive oil bottom was nearing. U.S. produced crude rallied 5.6% Wednesday and climbed back above $30 per barrel, well above its 13-year low of $26.05 hit last Thursday.

“We may be close to a bottom for oil prices,” says Alan Skrainka, chief investment officer at Cornerstone Wealth Management.

Adds Nick Sargen, senior investment advisor, at Fort Washington Investment Advisors: “My view is that the worries about oil and the economy haven’t disappeared. But I’m a believer that Saudi Arabia and Russia are feeling the pain of depressed prices and it is in their interest to try to set a floor for oil. Even if the price doesn’t rise significantly, it would arrest market fears that oil could fall to $20 per barrel or lower.”

The bottom line: Concerns of a 2008 redux have eased -- for now. “At the moment it seems like vindication for those like us that viewed this as more like the stealth bear market of 2011 than the financial crisis of 2008,” says PNC’s Stone.

Adam Shell on Twitter: @adamshell.

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