The Dow Jones industrial average and the S&P 500 closed about 1.3 percent lower after rallying nearly 3 percent earlier, their biggest reversal to the downside since Oct. 29, 2008. The S&P 500 remained in correction territory after falling there on Monday. The index also posted its first six-day losing streak since July 2012.
“That crash (Monday) was so big and so long since we had one (investors) don’t want a repeat of 2008 so they bail out,” said Lance Roberts, general partner at STA Wealth Management.
The Dow fell 205 points and S&P 500 closed below 1,900 after falling into negative territory in the last half hour of trade. The Nasdaq Composite failed to hold slight gains and closed 0.44 percent lower.
DJIA in last hour of trade
“Whatever triggered the consternation in the last few trading sessions is likely to be replayed again,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. He said a negative close “would be a set up to grind sideways to work out this process, if this rally and enthusiasm can’t last I think it’s an indicator (of that consternation).”
Earlier, the Dow gained as much as 441.5 points. Apple clung to gains of 0.6 percent after earlier surging 6 percent.
“This is typical after a wild swing we had yesterday,” said Peter Cardillo, chief market economist at Rockwell Global Capital. “It’s just going to take some time for confidence to rebuild in the market.”
The S&P traded about 1 percent higher and struggled to hold out of correction territory on an intraday basis. In the open, no stocks in the index hit new 52-week highs or lows, after about 200 names hit new 52-week lows Monday.
However, the gains fell short of recouping Monday’s more-than-3.5 percent plunge and the Dow remains on pace for its biggest monthly percentage loss since February 2009 and the Nasdaq since 2008. The S&P 500 is on track for its largest percentage loss since May 2010.
“It’s not as great as a bounce that many were anticipating,” said Kevin Mahn, chief investment officer at Hennion and Walsh. “I think obviously the market sold off far more than it should have.”
“We kind of dipped into that correction territory but we’re not going to stay there,” he said, noting the S&P 500 should trade more in pullback territory between 5 to 10 percent than in correction mode, between 10 to 20 percent lower.
Some of the things “bothering markets yesterday were China and collapsing commodity prices and both of those have given us some relief and when I look at China I don’t look at the Shanghai market. I look at the Hong Kong market,” said James Meyer, chief investment officer at Tower Bridge Advisors.
The Hang Seng closed up 0.72 percent, while the Nikkei plunged 4 percent and the Shanghai Composite extended recent losses to fall below the psychologically key 3,000 mark, down 7.6 percent. However, European stocks surged, with the DAX up nearly 5 percent.
Crude oil futures settled up $1.07, or 2.80 percent, at $39.31 a barrel. Brent traded more than 1 percent higher to above $43 a barrel.
For the rally to be real “if this is the bottom we have to end strong and follow-through tomorrow,” Meyer said.
In early trade Tuesday, Dow futures spiked above 600 points, implying an open of more than 450 points.
U.S. stock index futures extended gains after the Chinese central bank announced plans early in the morning ET to cut its one year lending rate to 4.6 percent, which the People’s Bank of China said was provide long-term liquidity and help support the economy.
“I’m looking for every reason to be a buyer,” said Nick Raich, CEO of The Earnings Scout, who remains bearish on equities. “We’re not upgrading our view at this point until we see topline growth… until then it’s going to be hard to sustain a rally.”
For Tuesday’s open, the New York Stock Exchange invoked Rule 48 for the second day in a row, Dow Jones reported.
The exchange used the rule before Monday’s open after futures for several major averages hit limit down. The last time the rule was used was during the financial crisis.
Read MoreWhat is Rule 48?
Stocks plummeted on Monday, with the S&P 500 joining the other major averages in correction territory. Nine of the 10 sectors are in correction territory, with consumer staples less than 1 percent away.
The Dow had its biggest intraday swing ever, falling as much as 1,089 points in the open on Monday. U.S. stocks closed more than 3.5 percent lower, off session lows in high volume trade as fears of slowing growth in China pressured global markets.
Cumulative trade volume was 13.94 billion shares as of 4:00 p.m. ET, the highest volume day since Aug. 10, 2011. Composite trade volume on the New York Stock Exchange was 6.57 billion shares, the heaviest since Oct. 27, 2011.
High-frequency trading accounted for 49 percent of Monday’s total trade volume of 14.2 billion shares, according to TABB Group. Average daily trade volume month-to-date is 7.5 billion shares, with high-frequency trading accounting for 49 percent. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.
Housing data out Tuesday missed expectations slightly but continued to indicate strength in the market. New home sales figures for Julycame in at an annual rate at 507,000. The Case-Shiller home price indices for June showing home prices rose less than expected.
In other economic news, the Conference Board’s consumer confidenceindicator for August rose to 101.5, beating expectations.
The U.S. dollar traded more than 1 percent higher against major world currencies, with the euro lower near $1.14 and the yen weaker against the greenback near 120 yen.
The Treasury Department auctioned $26 billion of two-year notes at a high yield of 0.663 percent, lower than the previous July auction. Demand was below average and the lowest since October.
Best Buy beat estimates by 15 cents with adjusted quarterly profit of 49 cents per share, with revenue also beating forecasts. Same-store sales rose 2.7 percent, compared to the Thomson Reuters forecast of a 1.0 percent increase.
Luxury homebuilder Toll Brothers reported a 12 percent rise in third quarter orders. Earnings and revenue were roughly in line with estimates, although profits were down from a year earlier.
Poultry producer Sanderson Farms posted earnings that fell substantially shy of the $2.90 consensus estimate with quarterly profit of $2.27, while revenue was also below forecasts. The company said a key factor in the quarter’s results was continued pricing pressure.
BHP Billiton reported full-year earnings earlier Tuesday which sent shares around 3 percent higher in London. This came despite the mining giant reporting an 86 percent plunge in net profit on the back of falling commodity prices, but investors cheered the group’s cost-cutting measures.
The Dow transports also reversed intraday gains to close down 1.7 percent, solidly in correction territory.
The S&P 500 closed down 25.6 points, or 1.35 percent, at 1,867.61, with utilities plunging more than 3 percent to lead all 10 sectors lower.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 37 points after spiking above 50 on Monday, its highest level since February 2009.
About nine stocks declined for every seven advancers on the New York Stock Exchange, with an exchange volume of nearly 1.3 billion and a composite volume of nearly 5.2 billion in the close.
Gold traded lower near $1,137.90 an ounce.
—CNBC’s Peter Schacknow contributed to this report
On tap this week:
8:30 a.m.: Durable goods
9:45 a.m.: Services PMI
10 a.m.: New York Fed President Dudley on regional economy, Q&A
1 p.m.: $35 billion 5-year note auction
Jackson Hole Fed symposium begins
8:30 a.m.: Initial claims
8:30 a.m.: Real GDP Q2 (second)
10 a.m.: Pending home sales
1 p.m.: $29 billion 7-year note auction
8:30 a.m.: Personal income
10 a.m.: Consumer sentiment
12:25 p.m.: Fed Vice Chairman Stanley Fischer at Jackson Hole; topic U.S. inflation
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