On Tuesday August 9, 2011, 1:03 pmBy Chuck Mikolajczak
NEW YORK (Reuters) - Stocks rebounded sharply on Tuesday after a major sell-off, but markets remained vulnerable to selling if the Federal Reserve fails to ease fears of a double-dip recession.
Volatility remained high after the benchmark S&P 500 dropped nearly 17 percent over the past two weeks on wrangling in Washington over the debt ceiling and soft economic data. Stocks almost immediately lost gains after the open and the Dow briefly turned negative before rebounding.
Equities suffered a massive drop on Monday, the first session since the United States lost it top-tier credit rating, with the S&P posting its worst one-day loss since December 2008 and nearing bear market territory. Volume was the heaviest since the "flash crash" in May 2010.
"You had a cataclysmic sell-off in the marketplace," said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.
"You are technically way oversold and secondly, this whole thing has been political."
The Dow Jones industrial average gained 174.75 points, or 1.61 percent, to 10,984.30. The Standard & Poor's 500 Index rose 25.87 points, or 2.31 percent, to 1,145.33. The Nasdaq Composite Index climbed 74.50 points, or 3.16 percent, to 2,432.21.
Federal Reserve policy-makers began meeting Tuesday morning, and the Fed's statement is due at 2:15 p.m EDT. While the central bank isn't expected to unveil any new program to help lift asset prices, selling could re-emerge if there's no indication that help is on the way.
Analysts were conflicted over what to expect from the statement, as some were unsure what action, if any, the Fed has left at its disposal.
"He's damned if he does and damned if he doesn't -- he's in a no-win situation this afternoon," Draughn said.
The CBOE Volatility index fell 15.2 percent, but was still up nearly 59 percent so far this month.
Standard & Poor's downgraded the U.S. credit rating late Friday, removing the nation's perfect triple-A designation for the first time in history. The rating agency's move sparked the stock market's huge sell-off and underlined fears a recession was inevitable, given increasing signs of slowing growth and more turmoil in the euro zone.
According to a Reuters poll, the United States faces one-in-four odds of slipping back into recession, though the economic outlook is raising the likelihood of new Fed action.
Even though fear remained a dominant emotion in the markets, analysts said stocks could be nearing a bottom. They noted the S&P 500 was now more technically oversold than at any other time in the last 10 years, with its 14-day relative strength index at 16.5 percent. A level below 20 generally attracts buyers.
Bank shares ranked among the best performers, as the S&P financial index gained 4.1 percent. Bank of America Corp, the S&P's biggest decliner on Monday, jumped 7.5 percent to $7.