Dow plunges 740 points, S&P 500 hovers close to bear market

U.S. stocks were back on the downswing Wednesday, underlining warnings from market veterans that sharp rebounding in what has so far been a down year for equities may be little more than the sort of volatile, short-lived upside rebounds characteristic of bear markets.

It is never wise to make too much of a bounce, particularly when no real capitulation has occurred, said Mark Newton, head of technical strategy at Fundstrat, in a Tuesday note.

The Dow Jones Industrial Average DJIA dropped 740 points, or 2.3%, while the S&P 500 SPX dropped 2.8% to close near 3,980 and the Nasdaq Composite COMP fell 3%. The Dow jumped more than 400 points on Tuesday, while the S&P 500 increased 2% and the Nasdaq rallied 2.8%.

The S&P 500 came within a whisker of entering bear market territory last week, a drop of 20% from a recent peak, before bouncing on Friday, with the S&P 500 falling sharply last week. 25 would be a 20% drop from the large-cap benchmark's Jan. 3 record finish.

The S&P 500 hovers close to bear market despite the bounce. Here is the number that counts.

Technical analysts were not sure if there was a near-term bottom, as the selloff in equities had remained largely orderly. A failure of the Cboe Volatility Index VIX, sometimes referred to as Wall Street's fear gauge, to push above the mid- 30 range was seen as a sign that investors hadn't made the kind of capitulation that often clears the way for a sustained rebound.

Some analysts are looking for upside that could cause market bears to be confused, despite positive market internals on the upside during Friday and Tuesday s bounce.

The upside volume on Russell 3000 RUA, constituents came in Tuesday at 88% - just shy of the bullish 90% threshold, said Jeff deGraaf, founder of Renaissance Macro Research.

The 10 day figure has become overbought, but deGraaf said it tends to be a bullish thrust signal three months forward and better than the three-week forward signal see chart below Wednesday. Investors who had brushed off severely disappointing results from Walmart Inc. WMT, also saw its margins take a hit from rising labor and fuel costs. Target shares fell more than 25%, leading to losses across the retail sector.

The Target stock plunges as consumer spending shifts and freight costs drop and freight costs increase.

In a note, Louis Navellier, founder of Navellier Associates, noted that Target was supposed to be shielded from a rise in the U.S. dollar against major rivals.

He noted that comments made by Jerome Powell on Tuesday were a hawkish affirmation of the central bank's resolve to tighten policy until inflation convincingly falls even if it causes economic pain.

Evidence of peak inflation may be needed for a sustained market recovery, Navellier wrote.

See also: Stock investors are starting to feel the 5 stages of bear market grief.